How does the Fed's decision today affect the so-called real economy?
>> how does the fed’s decision today affect the so-called real economy. that is, consumers and businesses will have to pay more when they borrow. and what will the fed do next? michael mckee spoke with bank one’s diane swonk shortly after the decision was released this afternoon.
>> the real issue here is that the federal reserve is raising rates to be more reflective and more in line with the economy we have as it slows. i have to admit i myself thought there was a chance the fed could do nothing today. i think they decided to do no news is good news and do exactly as expected even down to the measured statement but i think it’s important here that measured doesn’t necessarily mean every single moth and i think we’ll see a real opportunity for the federal reserve to clarify their words at the jackson hole, wyoming, meetings, which have taken on new importance, coming up august 26, now that chairman greenspan will be speaking at those meetings and that speech is closely watched anyway and more closely watched this year given everything has a magnified issue with regard to the economy leading up to the last weeks into the elections. of course, also having the jackson hole, wyoming meetings around the republican convention is an issue, as well. so the economy will be closely watched and talked about and how the fed intends to conduct policy will have to be clarified, i think, at those meetings.
>> we see the consumer price index rise and get record highs in oil prices. does the statement today tell you anything about how worried the fed is about inflation? does the fact that they raised rates today although there was discussion about not doing so telling you that they are concerned about what’s happening?
>> i think that’s very much an issue. i think the fact that they acknowledged it, although they thought price pressures were transitory, they still had to raise rates. they are normalizing rates. there’s a different situation where they’re trying to bring rates up to a less accommodative stance. they also pointed out that monetary policy is accommodative and they’re not trying to squelch growth. they think that oil prices are tronsatory but they thought that for a long time. i certainly don’t believe there’s a lot of fundamentals holding prices at current highs but a lot of emotion expressed earlier in terms of terrorist threats to venezuela, geopolitical situations, russia, what’s going on with yukos. all of that is feeding into higher oil prices but supply and inventories are picking up and more is coming online at higher prices, more supply is coming online and it is affecting the growth in the u.s. economy so you would expect oil prices to eventually fall but who knows when, who knows when all the emotions will be cleared out of the economy? my fear is we won’t see the real decline in oil prices we’d like to see until after the elections and that is―that’s not good news, certainly, for incumbents, also not good news for the u.s. economy because the longer the oil prices stick around, the more we have to pay in terms of the real costs―higher gas prices at the pump. that’s really the bigger issue here than interest rates. oil prices are the story all over the board.
>> a minute left. oil prices are affecting the economy but what about the fed’s interest rates? is this going to cause anybody reason to pause in terms of the kind of investments they’ll make, either consumers or businesses?%
>> no. i think as far as interest rates go, in fact, long-term interest rates have come down in recent weeks. we’ve seen other interest rates disconnect from monetary policy because in fact interest rates, the fed policy, it was well expected. so now they’re reacting to other factors, as well. anyone attached to a prime rate loan, of course, home equity loan that moves with the prime, will see a bit of increase. in terms of standard vehicle loans, every quarter point is worth $500 over a course of a five-year loan. that’s pretty insignificant on a monthly basis and won’t make or break spending decisions. at the moment, a quarter point is not a big deal and i think that’s one of the relationships the fed felt comfortable moving because if they have to move further later on down the road, at least they have a headstart on it where if they don’t have to move, they can step back and rates are still accommodative and low.
>> she has spoken. aside from the fed, we got fresh data on the economy today. worker productivity slowed in the quarter ending in june to 2.9%. that’s the lowest number we’ve seen in at least five quarters there, in fact, almost two years. smaller gaining is the companies have already gotten most of the efficiency they can out of their employees. meanwhile, labor costs were up about 2%. that, at the same time, the fast fastest in two years. slowdown in productivity could lead to increasing labor costs and prices. optimism among small businesses rose last month, expectations for the economy improved and more small business owners say they plan to increase spending and hiring. the national federation of independent business says its small business optimism index rose nearly three points to 105.9, only four points below the 18-year high it hit in december. the group’s chief economist says “capital spending remains strong and plans for future expansion also remain strong.” 35% of the small businesses surveyed expect an increase in inflation-adjusted sales, up from 26% that thought that way in june. 25% say it’s a good time to expand and that also 4% up from the prior month. former tyco c.e.o. dennis kozlowski and co-defend, mark swartz, back in court today. what’s next on their possible retrial? details when we return.
