The Federal Reserve, Part II
Brian Trumbore
President/Editor, StocksandNews.com

Updating my piece of last week, I have added some key statistics that reflect the investment environment as the Federal Reserve was making its interest rate decisions over the past few years.

Key:

The figures below the date represent the closing #'s for the S&P 500 one week before the rate decision, the day of the decision, and one week after.

The second line reflects the 'weekly' closing figures following the decision for the 10-year Treasury (starting 2000), gold and the price of oil.

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11/16/1999?.Fed raises target for federal funds rate 25 basis points to 5.50%.

1365?1420?1404

$296?$26.56

"Although cost pressures appear generally contained, risks to sustainable growth persist. Despite tentative evidence of a slowing in certain interest-sensitive sectors of the economy and of accelerating productivity, the expansion of activity continues in excess of the economy's growth potential. As a consequence, the pool of available workers willing to take jobs has been drawn down further in recent months, a trend that must eventually be contained if inflationary imbalances are to remain in check and economic expansion continue."

*Growth in GDP Q4 '99? 7.1%

2/2/2000?Fed raises 25 bps to 5.75%

1404?1409?1411

6.54%...$318?$27.22

"The Committee remains concerned that over time increases in demand will continue to exceed the growth in potential supply, even after taking account of the pronounced rise in productivity growth. Such trends could foster inflationary imbalances that would undermine the economy's record economic expansion."

3/21/2000?Fed raises 25 bps to 6.00%

1359?1493?1507

6.19%...$285?$28.05

*3/24, S&P hit all-time peak of 1527.

"Economic conditions and considerations addressed by the Committee are essentially the same as when the Committee met in February. The Committee remains concerned that increases in demand will continue to exceed the growth in potential supply, which could foster inflationary imbalances that would undermine the economy's record economic expansion."

*Growth in GDP Q1 '00? 2.6%

5/16/2000?Fed raises 50 bps to 6.50%

1412?1466?1373

6.49%...$274?$29.89

"Increases in demand have remained in excess of even the rapid pace of productivity-driven gains in potential supply, exerting continued pressure on resources. The Committee is concerned that this disparity in the growth of demand and potential supply will continue, which could foster inflationary imbalances that would undermine the economy's outstanding performance."

6/28/2000?Fed leaves the funds rate at 6.50%

1479?1454?1446

6.02%...$292?$32.40

"Recent data suggest that the expansion of aggregate demand may be moderating toward a pace closer to the rate of growth of the economy's potential to produce. Although core measures of prices are rising slightly faster than a year ago, continuing rapid advances in productivity have been containing costs and holding down underlying price pressures."

*Growth in GDP Q2 '00? 4.8%

8/22/2000?Fed leaves the funds rate at 6.50%

1484?1498?1509

5.72%...$273?$31.63

"Recent data have indicated that the expansion of aggregate demand is moderating toward a pace closer to the rate of growth of the economy's potential to produce. The data also have indicated that more rapid advances in productivity have been raising that potential growth rate as well as containing costs and holding down underlying price pressures."

*Growth in GDP Q3 '00? 0.6%

10/3/2000?Fed leaves the funds rate at 6.50%

1427?1426?1387

5.81%...$272?$30.80

"Recent data have indicated that the expansion of aggregate demand has moderated to a pace closer to the enhanced rate of growth of the economy's potential to produce. The more rapid advances in productivity also continue to help contain costs and hold down underlying price pressures."

11/15/2000?Fed leaves the funds rate at 6.50%

1409?1389?1322

5.70%...$266?$35.45

"The utilization of the pool of available workers remains at an unusually high level, and the increase in energy prices, though having limited effect on core measures of prices to date, still harbors the possibility of raising inflation expectations. The Committee, accordingly, continues to see a risk of heightened inflation pressures. However, softening in business and household demand and tightening conditions in financial markets over recent months suggest that the economy could expand for a time at a pace below the productivity-enhanced rate of growth of its potential to produce."

12/19/2000?Fed leaves the funds rate at 6.50%

1371?1305?1315

5.00%...$274?$26.18

"The drag on demand and profits from rising energy costs, as well as eroding consumer confidence, reports of substantial shortfalls in sales and earnings, and stress in some segments of the financial markets suggest that economic growth may be slowing further. While some inflation risks persist, they are diminished by the more moderate pace of economic activity and by the absence of any indication that longer-term inflation expectations have increased. The Committee will continue to monitor closely the evolving economic situation."

*Growth in GDP Q4 '00? 1.1%

1/3/2001?Fed lowers 50 bps to 6.00%

1328?1347?1313

4.93%...$269?$27.95

"These actions were taken in light of further weakening of sales and production, and in the context of lower consumer confidence, tight conditions in some segments of financial markets, and high energy prices sapping household and business purchasing power. Moreover, inflation pressures remain contained. Nonetheless, to date there is little evidence to suggest that longer-term advances in technology and associated gains in productivity are abating."

1/31/2001?Fed lowers 50 bps to 5.50%

1364?1366?1340

5.15%...$267?$31.19

"Consumer and business confidence has eroded further, exacerbated by rising energy costs that continue to drain consumer purchasing power and press on business profit margins. Partly as a consequence, retail sales and business spending on capital equipment have weakened appreciably. In response, manufacturing production has been cut back sharply, with new technologies appearing to have accelerated the response of production and demand to potential excesses in the stock of inventories and capital equipment."

3/20/2001?Fed lowers 50 bps to 5.00%

1197?1142?1182

4.80%...$261?$27.30

"Persistent pressures on profit margins are restraining investment spending and, through declines in equity wealth, consumption. The associated backup in inventories has induced a rapid response in manufacturing output and, with spending having firmed a bit since last year, inventory adjustment appears to be well underway."

*Growth in GDP Q1 '01? -0.6%

4/18/2001?Fed lowers 50 bps to 4.50%

1165?1238?1228

5.28%...$265?$27.28

"The FOMC has reviewed prospects for the economy in light of the information that has become available since its March meeting. A significant reduction in excess inventories seems well advanced. Consumption and housing expenditures have held up reasonably well, though activity in these areas has flattened recently. Although measured productivity probably weakened in the first quarter, the impressive underlying rate of increase that developed in recent years appears to be largely intact."

5/15/2001?Fed lowers 50 bps to 4.00%

1261?1249?1309

5.40%...$288?$29.91

"A significant reduction in excess inventories seems well advanced. Consumption and housing expenditures have held up reasonably well, though activity in these areas has flattened recently. Investment in capital equipment, however, has continued to decline. The erosion in current and prospective profitability, in combination with considerable uncertainty about the business outlook, seems likely to hold down capital spending going forward. This potential restraint, together with the possible effects of earlier reductions in equity wealth on consumption and the risk of slower growth abroad, continues to weigh on the economy."

6/27/2001?Fed lowers 25 bps to 3.75%

1223?1211?1219

5.40%...$271?$26.25

"The patterns evident in recent months - declining profitability and business capital spending, weak expansion of consumption, and slowing growth abroad - continue to weigh on the economy. The associated easing of pressures on labor and product markets is expected to keep inflation contained."

*Growth in GDP Q2 '01? -1.6%

8/21/2001?Fed lowers 25 bps to 3.50%

1186?1157?1161

4.92%...$275?$26.90

"Household demand has been sustained, but business profits and capital spending continue to weaken and growth abroad is slowing, weighing on the U.S. economy. The associated easing of pressures on labor and product markets is expected to keep inflation contained."

9/17/2001?Fed lowers 50 bps to 3.00% [Post 9/11]

1092?1038?1003

4.69%...$291?$25.97

"Even before the tragic events of last week, employment, production, and business spending remained weak, and last week's events have the potential to damp spending further. Nonetheless, the long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate. For the foreseeable future, the Committee continues to believe that against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness."

*Growth in GDP Q3 '01? -0.3%

10/2/2001?Fed lowers 50 bps to 2.50%

1012?1051?1056

4.51%...$292?$22.39

"The terrorist attacks have significantly heightened uncertainty in an economy that was already weak. Business and household spending as a consequence are being further damped. Nonetheless, the long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate."

11/6/2001?Fed lowers 50 bps to 2.00%

1059?1118?1139

4.30%...$278?$22.22

"Heightened uncertainty and concerns about a deterioration in business conditions both here and abroad are damping economic activity. For the foreseeable future, then, the Committee continues to believe that, against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness."

12/11/2001?Fed lowers 25 bps to 1.75%

1144?1136?1142

5.18%...$278?$19.23

"Economic activity remains soft, with underlying inflation likely to edge lower from relatively modest levels. To be sure, weakness in demand shows signs of abating, but those signs are preliminary and tentative. The Committee continues to believe that, against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future."

*Growth in GDP Q4 '01? 2.7%

1/30/2002?Fed leaves the funds rate at 1.75%

1128?1113?1083

4.98%...$286?$20.38

"Signs that weakness in demand is abating and economic activity is beginning to firm have become more prevalent. With the forces restraining the economy starting to diminish, and with the long-term prospects for productivity growth remaining favorable and monetary policy accommodative, the outlook for economic recovery has become more promising."

3/19/2002?Fed leaves the funds rate at 1.75%

1165?1170?1138

5.39%...$297?$25.35

"The information that has become available since the last meeting of the Committee indicates that the economy, bolstered by a marked swing in inventory investment, is expanding at a significant pace. Nonetheless, the degree of the strengthening in final demand over coming quarters, an essential element in sustained economic expansion, is still uncertain."

*Growth in GDP Q1 '02? 5.0%

5/7/2002?Fed leaves the funds rate at 1.75%

1076?1049?1097

5.13%...$311?$27.99

"The information that has become available since the last meeting of the Committee confirms that economic activity has been receiving considerable upward impetus from a marked swing in inventory investment. Nonetheless, the degree of the strengthening in final demand over coming quarters, an essential element in sustained economic expansion, is still uncertain."

6/26/2002?Fed leaves the funds rate at 1.75%

1019?973?953

4.80%...$314?$26.86

"The information that has become available since the last meeting of the Committee confirms that economic activity is continuing to increase. However, both the upward impetus from the swing in inventory investment and the growth in final demand appear to have moderated. The Committee expects the rate of increase of final demand to pick up over coming quarters, supported in part by robust underlying growth in productivity, but the degree of the strengthening remains uncertain."

*Growth in GDP Q2 '02? 1.3%

8/13/2002?Fed leaves the funds rate at 1.75%

859?884?937

4.32%...$314?$29.33

"The softening in the growth of aggregate demand that emerged this spring has been prolonged in large measure by weakness in financial markets and heightened uncertainty related to problems in corporate reporting and governance.

"The current accommodative stance of monetary policy, coupled with still-robust underlying growth in productivity, should be sufficient to foster an improving business climate over time."

9/25/2002?Fed leaves the funds rate at 1.75%

869?839?827

3.67%...$321?$30.54

"Over time, the current accommodative stance of monetary policy, coupled with still-robust underlying growth in productivity, should be sufficient to foster an improving business climate. However, considerable uncertainty persists about the extent and timing of the expected pickup in production and employment owing in part to the emergence of heightened geopolitical risks."

*Growth in GDP Q3 '02? 4.0%

11/6/2002?Fed lowers 50 bps to 1.25%

890?923?882

3.86%...$321?$25.78

"The Committee continues to believe that an accommodative stance of monetary policy, coupled with still-robust underlying growth in productivity, is providing important ongoing support to economic activity. However, incoming economic data have tended to confirm that greater uncertainty, in part attributable to heightened geopolitical risks, is currently inhibiting spending, production, and employment. Inflation and inflation expectations remain well contained."

12/10/2002?Fed leaves the funds rate at 1.25%

920?904?902

4.07%...$333?$28.44

"The Committee continues to believe that this accommodative stance of monetary policy, coupled with still-robust underlying growth in productivity, is providing important ongoing support to economic activity. The limited number of incoming economic indicators since the November meeting, taken together, are not inconsistent with the economy working its way through its current soft spot."

*Growth in GDP Q4 '02? 1.4%

1/29/2003?Fed leaves the funds rate at 1.25%

878?864?843

3.97%...$369?$33.51

"Oil price premiums and other aspects of geopolitical risks have reportedly fostered continued restraint on spending and hiring by businesses. However, the Committee believes that as those risks lift, as most analysts expect, the accommodative stance of monetary policy, coupled with ongoing growth in productivity, will provide support to an improving economic climate over time."

3/18/2003?Fed leaves the funds rate at 1.25%

800?866?874

4.10%...$326?$26.91

"While incoming economic data since the January meeting have been mixed, recent labor market indicators have proven disappointing. However, the hesitancy of the economic expansion appears to owe importantly to oil price premiums and other aspects of geopolitical uncertainties. The Committee believes that as those uncertainties lift, as most analysts expect, the accommodative stance of monetary policy, coupled with ongoing growth in productivity, will provide support to economic activity sufficient to engender an improving economic climate over time."

*Growth in GDP Q1 '03? 1.4%

5/6/2003?Fed leaves the funds rate at 1.25%

917?934?942

3.68%...$348?$27.72

"Recent readings on production and employment, though mostly reflecting decisions made before the conclusion of hostilities, have proven disappointing. However, the ebbing of geopolitical tensions has rolled back oil prices, bolstered consumer confidence, and strengthened debt and equity markets. These developments, along with the accommodative stance of monetary policy and ongoing growth in productivity, should foster an improving economic climate over time."

6/25/2003?Fed lowers 25 bps to 1.00%

1010?975?993

3.54%...$345?$29.27

"The Committee continues to believe that an accommodative stance of monetary policy, coupled with still robust underlying growth in productivity, is providing important ongoing support to economic activity. Recent signs point to a firming in spending, markedly improved financial conditions, and labor and product markets that are stabilizing. The economy, nonetheless, has yet to exhibit sustainable growth. With inflationary expectations subdued, the Committee judged that a slightly more expansive monetary policy would add further support for an economy which it expects to improve over time."

Sources:

Federal Reserve [federalreserve.gov]
National Bureau of Economic Research [nber.org]
StocksandNews.com archives

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Wall Street History will return August 15.

Brian Trumbore