FOMC Outlook for 2007

Will the FOMC keep a neutral outlook on the interest rate, or raise it once again?

In Chairman Ben Bernanke’s semiannual monetary policy report on February 15 he outlined several reasons for the FED not to increase or to decrease the interest rate in the near-term. First, the U.S. economy is showing potential for consistent expansion at a moderate pace over the next year, with growth strengthening, imports increasing, and the housing market becoming less of a burden. Second, the core inflationary pressures are showing signs of decreasing. The primary reason for the decline was the drop in the price of crude oil toward the end of last year, which has led to lower prices for fuel at the pump, inputs for producers, and – thus - final products that you buy at the store. Therefore, since the economic growth is continuing at a moderate pace and inflation abating, the need to increase interest rates does not appear to be there.

Now, whether or not this will hold true will be determined by the data published on key economic variables over the next several months. Based on that data, if we can see steady economic growth and a gradual increase in the core prices paid on goods and services, then the FED should be poised for one more interest hike. The sectors – and corresponding indicators - that we will want to follow are listed below.

Housing Sector: New Home Sales, Existing Home Sales, Rent Increase

Consumer Spending: Personal Consumption Expenditures (PCE)

Economic Growth: Real Gross Domestic Product

Inflation: Labor Compensation, Crude Oil Prices, and PCE