Fed to halt rate increases -- Slow U.S. growth a concern

August 2, 2006

On August 1, the Department of Commerce released the inflation report for July, which stated that the core Consumer Price Index, excluding food and oil, was 2.4% higher than a year ago. This exceeds the Federal Reserve’s 2% informal inflation target.

In the same report, the U.S. economy’s growth in the second quarter was 2.5%, which shows significant slowing from the first quarter GDP growth of 5.6%.

However, in Federal Reserve Chairman Ben Bernanke’s July 19th testimony to the Senate Banking Committee, he stressed his concern about the impact of the Fed’s past 17 rate increases. It generally takes about 6 months for those changes to slow the economy, and he said that the effect was already being felt in the housing industry.

What It Means:
The U.S. economy and the stock market are slowing down. This lessens the strength of the dollar, and increases the value of European and Asian currencies. Some countries that are highly dependent on the U.S. consumer market, such as China, will also see slower growth. However, Europe and Japan are not as dependent on the U.S. market, and will see sustained growth over the next 18 months.

Action Steps:
If you are contributing to a 401K or IRA, consider switching ongoing payroll deductions to funds that aren’t as dependent on U.S. growth:

• U.S. large cap funds, which contain multinationals that have a lot of foreign markets,
• Global funds, which can increase the percentage of foreign corporations,
• Euro-Pacific funds, which will concentrate in the two areas that are not as dependent on the slowing U.S. market.

Source: U.S. Commerce Department web site,”Testimony of Chairman Ben S. Bernanke to the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, July 19, 2006 Federal Reserve Board web site.