Tuesday, August 08, 2006

It's the Economy, stupid!

Investor's Business Daily with a word of advice for Ben Bernanke:

What does this mean?

That growth in the job-creating part of the economy is clearly ratcheting down. And that the economy isn't "overheating." And given tepid money supply of about 4%, fears of rampant inflation seem to be overdone.

Other recent reports back this up. GDP growth slowed to 2.5% in the second quarter. Yields on 10-year Treasuries dropped Friday to 4.90% — the lowest in four months. The Housing Market Index from the National Association of Home Builders hit a 14-year low in July, while small business optimism is at its lowest in three years. The list goes on and on.

These are not signs of strength — or of inflation. But they should be major warning signs for the Fed as it prepares to meet Tuesday to decide whether to lift rates for an 18th straight meeting, to 5.5%.

Here's our advice to the Fed, once again: Hold your fire. If ever there was a time in the economy when it appeared we'd reached a turning point, this is it.

We're not the only ones who think this, by the way. In the past two weeks, the fed funds futures market — where investors make bets on the future level of interest rates — marked down the chances of a rate hike on Tuesday from a near sure thing to about 19%.

We've argued here the economy is much stronger than the media spinmeisters say. We still feel that way. But that doesn't mean it can't be taken down by a Fed mistake.

The Fed will do no harm in taking a breather this month and seeing how things shake out in the real economy. But it could do a lot of harm by going even a quarter-point too far in its rate hikes.

As a homeowner stuck with a piece-of-junk second, I concur.

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