http://www.economy.com/dismal/article_free.asp?cid=192412&src=moodys * The latest economic reports suggest growth last quarter was significantly weaker than expected.
* Soft consumer spending appears to be weighing on growth this quarter.
* The Federal Reserve is sounding less confident about the outlook.
* We are pushing back our call for the first Fed interest rate increase.
Reports on growth this past week were uniformly weak. Inventory and trade data for June suggest second quarter growth was significantly weaker than expected. We now expect second quarter growth to be revised sharply lower, to 1.2%, from 2.4% originally. Hard data for July and early surveys for August point to sluggish growth this quarter, weighed down by soft consumer spending.
The biggest news was the Fed’s decision to reinvest mortgage prepayments into Treasuries, reflecting less confidence about the outlook and a desire to ease financial conditions. We now do not expect the Fed to begin raising either the interest rate paid to banks on reserves or the federal funds target rate until the fourth quarter of 2011, rather than in the spring. The weak economy and the Fed's latest words and actions suggest a better than even chance it will adopt a more expansionary stance later this year or early next.
FOMC grows worried
By stabilizing its balance sheet north of $2 trillion, the central bank has adopted a neutral stance, halting the shrinkage of its balance sheet that had a tightening effect on monetary policy. Still, this shift is more symbolic than real. Before Tuesday’s FOMC meeting, the Fed’s balance sheet was shrinking by about $10 billion per month as mortgage-related holdings matured or were prepaid. Now the Fed is buying an offsetting dollar amount of Treasuries.
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