Experts Talk Fed Policy, Inflation, Manufacturing

Bloomberg BusinessWeek compiles comments from Wall Street economists and strategists on the key economic and market topics of Dec. 11. Michael Wallace, Action Economics The Federal Open Market Committee began its two-day meeting [on Dec. 15] with considerable market uncertainty over how much policymakers will alter the statement and introduce more of an exit strategy. Despite the much-improved November payroll report and indications that the economy emerged from recession last quarter, Fed Chairman Bernanke's recent comments have been as cautious as they have been optimistic, and that has allayed market concerns that there will be major changes in the key phrase on rates. Bernanke has stressed the ongoing headwinds to growth [and] has warned that unemployment will remain high. Hence, even though we believe it would behoove the FOMC to start to enunciate an exit strategy, it doesn't seem as though it will happen on Wednesday [Dec. 16]. So, we look for reiteration that rates will be left "exceptionally low" for an "extended period." We don't expect any changes to its asset purchase programs, where the Treasury buyback has been completed, while agency purchases will be wound down next quarter, in the $175 billion area. Ted Weissman, Morgan Stanley The Industrial Production report [released on Dec. 15] was stronger than expected. After a pause in October that followed the best three-month run since 1997, industrial production resumed ramping higher in November with a 0.8% gain overall and a 1.1% spike in the key manufacturing gauge. Since turning the corner in July, manufacturing output has now surged at an 11% annual rate, the best gain over such a period since 1997. While a huge recovery in the motor vehicles sector has been the biggest contributor to this reversal, the upside has become broadly based in recent months. David Greenlaw, Morgan Stanley The rise in both the headline and core producer price index [up 1.8% and 0.5%, respectively, in November] was somewhat sharper than even we had anticipated. However, the upside was entirely attributable to larger-than-expected increases in quotes for gasoline and SUVs. Gasoline prices have pulled back in a meaningful way over the past month and the SUV spike appears to be a timing issue. Beth Ann Bovino, Standard & Poor's The New York Fed's Empire State Index plunged 21 points to 2.6 in December. While it remains above the zero marker, indicating growth, it was much weaker than the 25.0 expected by markets. Moreover, it was the largest drop since 2001. The slide likely increases concerns that the recovery in manufacturing was short-lived. New orders declined to 2.2, from 16.7, while employment fell to -5.3, from 1.3 the month before. The 6-month-ahead reading edged down to 43.0, from 57.0, although the 6-month-ahead capital expenditures reading rose to 30.2, from 21.1, for a little bit of good news. The weaker-than-expected data will likely weigh on markets, offsetting some of the impact from the unexpectedly strong PPI data.

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