October 2005

A Viral Inflation

The Fed seems intent on displaying to the market, at every opportunity, its’ intention to raise interest rates at the next FOMC meeting and at the following two meetings – which coincide with the end of Mr. Greenspan’s tenure at the Fed. Comments from Dallas Fed President Richard Fisher lamenting inflation fears have weighed on the markets this week. Mr. Fisher’s parallels of inflation as a “virus” that shows “little inclination” of declining marks new ground as the Fed leaves little doubt as to its intention to raise rates in the months ahead. Adding to worries of higher U.S. interest rates and the effects that it may have on the economy, European Central Bank President Jean-Claude alluded that the ECB is prepared to increase interest rates for the first time since 2000. However, at its latest meeting on October 6th the ECB elected to leave its twelve-nation euro zone rate unchanged at 2%.

Further disquieting to the markets in early October, a month typically weak for the stock market to begin with, was news that the all-important service sector of the U.S. economy may be weakening. The Institute for Supply Management (ISM) reported that its’ September non-manufacturing index fell 11.7 points to 53.3% - a level not seen since April 2003. Any reading above 50 is theoretically a measure of an expanding economy. With borrowing costs rising and energy prices surging as we head into the winter season, the markets were taken back by such a large drop in the non-manufacturing sector of the economy. At what level will the resilient U.S. consumer feel that “last straw?” We don’t know, but believe the time is near.