Fed must decide how to play the recovery

The central bank may hint Tuesday on how Friday's jobs report affects their view on interest rates. Watch this week's CPI report. Earnings are due from Urban Outfitters, Ross Stores and Winnebago.

By Charley Blaine Mar 9, 2012 9:50PM
Charley BlaineFriday's jobs report puts the Federal Reserve into a tricky position. It wants to keep interest rates low because the economic recovery is still modest. But at some point, it will need to act to prevent inflation from becoming a problem.

You're going to hear a lot about this in the week ahead. The Fed's rate-making body, the Federal Open Market Committee, meets Tuesday and is likely to leave rates alone again. The inflation question, however, will surely be discussed before, during and after the meeting. The debate will become increasingly public in the months ahead.

That could be bad for investors in the long run because rising interest rates will pressure stocks, which haven't advanced much in March after a great January and good February.

The Dow Jones industrials ($INDU) are down 0.2% this month. Gains for JPMorgan Chase (JPM), Starbucks (SBUX), Lowe's (LOW) and PulteGroup (PHM) have been offset by declines in Caterpillar (CAT), Google (GOOG) and airlines. Apple (AAPL) has been flat.

Savers should be happier if rates rise; they'll get more on their certificates of deposit and money market funds. But patience is probably a smart tactic.

Article continues below.
What investors will hear from the Fed on Tuesday afternoon is something like this:

The central bank sees the economy growing moderately. Job creation is getting stronger. The economy has added 2.8 million jobs over the last 17 months. But the unemployment rate is still too high at 8.3%, and 5.4 million Americans haven't worked in six months or more.

There are big head winds looming, with Europe's fragile state a big issue. Oil prices are rising and may push gasoline prices higher, which could dampen consumer spirits and spending.

Though the Fed won't mention it, there are worries about how markets would react if the tensions over Iran turn into military action.

So, the one thing Fed Chairman Ben Bernanke doesn't want to do is tighten too quickly and stall the recovery.

Wall Street doesn't want that to happen, either. What Wall Street really wants is another round of quantitative easing that makes money exceedingly cheap and fuels stock and commodity speculation.

Arrayed against Bernanke are a number of FOMC members who are concerned that the Fed may miss the signal of an accelerating economy that brings with it new wage and other pressures. This past week, the Commerce Department said labor costs were up 2.8% in the fourth quarter. Yes, it was lower than the 3.9% rise in the third quarter, but it was much higher than the initial fourth-quarter estimate.

The Fed meeting and statement that comes out on Tuesday are probably the week's premier economic event. It will be parsed ad nauseam. But it will probably say or hint this: The central bank will keep rates ultra-low perhaps until 2014 because it wants to grow the economy. It will give itself room to act if inflation acts up.

Inflation will be a theme all week. You'll see people looking for it in the Commerce Department's Tuesday report on retail sales, which comes out before the Fed announcement.

It will turn up again on Thursday when the Labor Department reports on wholesale prices in the Producer Price Index.

It will finish the week on Friday in the Consumer Price Index report. This will get a lot of attention. You will be able to see the impact of higher gasoline prices. Between January 2011 and January 2012, gasoline prices jumped 9.7%. Fuel oil was up 12.1%.

The retail price of gasoline is up 14.7% this year, but most of that gain came in January and February. Watch, too, for other prices as well.

Also due next week:

Manufacturing reports Thursday from the New York and Philadelphia Federal Reserve Banks. Investors do watch these reports, especially the report from the Philly Fed.

Friday will bring reports on industrial production and capacity utilization. These will tell us how much slack is in the economy.

Markets for the week



3/9/2012

3/2/2012

% chg.

YTD chg.
Dow Industrials

12,922.02

12,977.57

-0.43%

5.77%
S&P 500

1,370.87

1,369.63

0.09%

9.01%
Nasdaq 

2,988.34

2,976.19

0.41%

14.71%
Russell 2000

817.00

802.42

1.82%

10.27%
Crude oil 

$107.40

$106.70

0.66%

8.67%
(per barrel)











U.S. Dollar Index 

80.08

79.46

0.78%

-0.54%
10-yr. Treasury

2.04%

1.99%

2.62%

8.93%
Gold

$1,711.50

1,709.80

0.10%

9.24%

Earnings: Clean Energy, Urban Outfitters, Ross Stores
The week ahead is not a huge week for earnings reports. Here's what to watch for.

Monday: Volkswagen (VLKAY) Clean Energy (CLNE) and apparel retailer Urban Outfitters (URBN). Clean Energy supplies natural gas to customers who want to power trucks and other commercial vehicles. It's growing rapidly, but it's not turning a profit. Urban Outfitters has struggled to generate revenue growth over the last few quarters. For Volkswagen, the question is how worried is the company about a recession this year in Europe.

Tuesday: Callon Petroleum (CPE) and clothing retailer Pacific Sunwear of California (PSUN). 

Wednesday: Ross Stores (ROST). Ross is the star of the day. It has capitalized on consumer worries about the economy. The shares hit a new all-time high of $56.22 on Friday.

Thursday: Cable-television broadcaster AMC Networks (AMCX) and Winnebago Industries (WGO). AMC is a strong player in cable TV with popular shows. The stock is near an all-time high. Winnebago is a bet on gasoline prices. If prices fall, the stock should rise.

Also next week are analyst meetings for Anadarko Petroleum (APC) and Chevron (CVX).




106Comments
Mar 9, 2012 10:25PM
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Recovery, what recovery?????!!!!!! It's all a bunch of B.S. How stupid do they think we are?
Mar 9, 2012 10:16PM
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The last downturn began in 2007 and we have one every four to six years. So we're due for another.

 

The Euro Zone is loosing altitude and can't pull up as the rest of the PIIGS line up to default.

China is still slowing, and an oil shock could happen anytime.

 

I hope you're all enjoying the robust recovery all the stimulus has bought. Don't count on it lasting too much longer

Mar 9, 2012 10:59PM
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In so, so many ways, this is not a recovery.  Anyone who looks at the US, as a whole, sees a nation in a steady decline.  Our infrastructure is junk, educational system a disaster, millions unemployed, other millions that will never work again, endless wars we cannot win, the most expensive and incompetent health care system in the industrialized world, endless government "happy" lies, debt levels beyond imagination and the list goes on.  The jobs being created are low paying with no benefits and we are calling this a recovery.  From the ivory towers of managed media come the endless repetitious articles written according to the mandated demands of a handful of the elite. 

 

The Fed has painted itself into a corner.  For every 1% of interest rate increase, our interest payments increase by 150 billion a yr.  As we slide ever further into oblivion, nations will stop supporting us. And support us it is as we are unable to support ourselves.  The US depends on the welfare payments of the rest of the world.  I call it welfare as everyone with the ability to think knows we will never pay back the money we have borrowed.  Many other countries are well into the march away from the dollar as they disconnect from us. 

 

Raise interest rates?  Hardly!! We can't afford to. But then if we don't, the welfare payments will stop ever sooner. It's a trap and we are surely caught!! 

 

 

Mar 9, 2012 11:36PM
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The only "recovery" is the one that exists in the imagination of politicians, and the media elite if you will that writes these kinds of articles.  Main street is still in a recession, and doesn't see an end in sight yet....
Mar 12, 2012 6:41AM
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Recovery?   You see more green shoots?  You are looking forward to the forth annual 'recovery summer'?  You really believe unemployment has dropped so dramatically?  You believe in Obamanomics?

 

LOL...  How is that working out for ya?

Mar 9, 2012 10:28PM
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  Admittedly, I'm a old guy.  Limited education, rural midwest upbringing.  But, please explain to me why our government thought that during the time I was borrowing money (Carter years) that 18% was a good idea.  And now that what little I have left in my retirement savings is returning something less than one percent?  (Obama years).  Is a good idea as well? 

Mar 9, 2012 10:49PM
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Just what Recovery are they  the FEDs responding to?

Taxes,food,gas are too damn high,jobs are scarest and Obama is still in office laying about everything and desperate to take credit for anything he can find to that his administration hasn't screwed up or ruined!

So again just what Recovery are we dealing with?

Saying it,printing it doesn't make it so or the truth......so stop tugging on Supermans cape already!

Mar 10, 2012 12:58AM
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What Recovery?  Stop with the recovery talk.

America is circling the drain, getting ready to get flushed!

15 Trillion and growing in Federal debt, a Federal Government that is spending over a TRILLION DOLLARS a year more than it brings in in revenue, states can't make their budgets, $4.00 plus gasoline, heat and food prices on the rise, and you think this is a recovery.  P-L-E-A-S-E get a clue!

Mar 9, 2012 10:25PM
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Their won't be a change idiot.The unemployment rate is still at 8.3% ans people who fell off the system is greater than the gain.Report on something intelligent.
Mar 12, 2012 6:09AM
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The fed keeping the interest rates low, will in the end cause us inflation.  You cannot keep printing money to pay off the debt and not have it affect our inflation later on.  I am curious to see the results of this and how much it will affect inflation, coupled with the rising price of oil, which is tied to the dollar.  The less the dollar is worth, the more oil costs us per barrel.  When Bush was President, oil was at $140 per barrel before it hit $4 per gallon of gas.  We are around $108 per barrel and already at $4 per gallon.  Pretty much shows the affect of the federal reserve.  Bottom line, is that we have to get our spending under control.  It is not the federal government hiring that we get our country out of the recession, it is the federal government putting in to place the policies for businesses to hire.  We need to get rid of a lot of rules, regulations, and laws, which may be well intended, many contradict each other.
Mar 10, 2012 12:03AM
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So it goes up for 5 seconds and they are calling it a "recovery"?  Wow they are so desperate.
Mar 12, 2012 6:39AM
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ActiveRIA...

 

You know I have little use for Keynesian economics as practiced by our Fed and politicos.  The reason is as you have stated.  We practice the spending part of Keynesian economics with none of the other pieces.   You are completely right about the debt not being part of Keynesian economics.

 

Like any other system, if you only execute the parts you like and the medicinal parts, then things badly wrong.  I am deeply concerned about our 15.6 trillion in debt (at least 16.8 trillion before Obama leaves office, likely more like 22 trillion if he is re-elected).  At 6% a 20 trillion debt would have interest of 1.2 trillion/year or 33% more than our existing bloated defense budget.

 

I also am against "Stimulus" spending and new entitlements.  And I am sure you remember my opposition to Medicare Part D (a huge entitlement to people who NEVER CONTRIBUTED a DIME to it).  And the Stimulus spending was a total waste.  At least when Reagan spent money we recieved things like Aircraft Carriers and real new infrastructure projects.  With Obama we recieved nothing but sped up road resurfacing.  The number of bridge repairs actually declined and the number of new bridges hit a record low.  Shovel ready indeed....

 

In short, we will NEVER repay our debt. except by printing ever more dollars worth less and less.  Worse yet, all this spending negative multiplier effect hurt GDP growth.  Now the repayment of that debt will reduce GDP growth in the future.

Mar 9, 2012 10:44PM
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Gabagool, you're absolutely right...what the he!! kind of "recovery" are they talking about?? There IS NO recovery.  The only thing that's recovering is the stock market...not the real world.  I'm really afraid what we're going to see is that we go from stagflation to rampant inflation in a heartbeat, and there won't be a dam* thing that helicopter Ben can do to stop it.
Mar 10, 2012 3:37PM
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Some of the boomers I know have not saved the first penny towards their retirement. Some I know who should have retired are still carrying a lunch box to work. All of the boomers who thought they would be getting a reasonable amount of interest on and money they have saved are out of luck. ♥♥♥♥♥♥ The Fed Is heartless and doesn't care about any of you who have CDs or money market accounts that you were counting on to help you in retirement. Social Security will not be nearly enough to live on.  There will be a huge problem with this as time goes on.
Mar 10, 2012 12:34AM
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Regardless of what happens in Greece, this economy is in serious trouble !!!!!!
Mar 9, 2012 11:24PM
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This isn't a recovery unemployment is still to high and the only thing selling is new cars. I do want the see what consumer spending is doing on other goods except cars to see the whole picture. If people are buying cars, but not washers furniture, and other big purchases then what does that say about this recovery. What is important here is are they borrowing long term to buy cars too. I heard the other day people were going with 66 and 72 month financing and that indicates other issues... 

We need to look at more than this before the FED does anything I'd say.

Mar 12, 2012 6:27AM
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What recovery? Don't count your eggs before they've hatched.
Mar 10, 2012 12:12AM
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Dissolve the FED.  Jail its principals.  Seize their assets.  Treason still IS a crime, you know.

Mar 10, 2012 3:57PM
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Lynn X, of course savers, pension funds, investors (in Bonds & CD's) are being punished.  It is called Inflation.  The FED reduces you rate to near zero, and at the same time inflates at 10% plus per year (as measured in the increase in money supply). This is like a tax on responsible to support the irresponsible.   With 48% paying zero taxes, and Obama/Bernache practicing Obamanomics, you cannot be invested in bank deposits, CD's, bonds or Treasuries.  You MUST buy stocks, foreign currencies or Specie.

 

The government cannot let interest rates go up.  15.6 Trillion at 6% would exceed the defense budget.  Without a balanced budget  the only way to pay off Obama's debt will be to PRINT like 1923 Germany.  This has a far greater chance of happening every year we run trillion plus deficits.

 

We continue to spend more than we take in.  Pity the poor person that  will be left holding Treasuries when it's haircut time...  Unlike Greece, no one is big enough to bail us out, so we will have to PRINT and DEBASE our way out of debt.  That is the Donkey parties solution to OBAMANOMICS...

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