Foreboding. That's the only word for today's report. We could be facing our worst case scenario: rising inflation in a slowing economy.
Inflation hawks may be eating crow today. Despite their fears of tight labor markets and a strong economy, inflation is only creeping, not accelerating. I don't think that this report assures that the Fed tightening cycle is over, but I wouldn't be surprised to see rising market expectations of a rate cut. With most prices in check and energy prices easing, this report is about as good as it gets.
The latest economic releases are just another sign that the economy is quite sick. I am quite confident the Fed will react aggressively.
Record crude prices usually mean record trade gaps. Nobody sees relief on the energy front any time soon.
The employment situation, which has the most direct impact on everyone's lives and outlook, is still precarious, and that's causing a lot of anxiety. They're worried about their jobs, but at the same time, I think they sense that this mild recession appears to be ending, and that will raise their hopes.
Consumers, who have kept the economy from drowning during this recession, continued to spend, albeit cautiously, in January and may be leading the way to recovery.
The report isn't so tame as to deter the Fed from bumping rates another notch, especially with Y2K fears dissipating and consumers showing no signs of fatigue. However, it should ease market fears that the Fed will need to tighten several more times.
I would think the probability of a move (on interest rates) would be somewhere around the 40 percent range.
The longer we go along this path, the clearer it becomes that the Fed may have to jolt consumers and investors with a more aggressive policy.
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