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Prime Rate

also known as the Fed, National, U.S. and WSJ Prime Rate

Monday, February 13, 2006

Notable Comments Made By Cleveland Fed Reserve Bank President Sandra Pianalto Today

Sandra Pianalto, who is The President of The Cleveland Federal Reserve Bank, and who is also a voting member of the Federal Open Market Committee (FOMC) this year, had some interesting things to say in a speech she made in front of The Cleveland Association for Business Economics (CABE) today. Here's a snippet from today's speech:

"Now, it is true that the advance estimate for fourth-quarter GDP growth was only 1.1 percent. Some may interpret this weak performance as a sign that the energy shocks may have finally taken their toll. However, we should remind ourselves that these are preliminary numbers. Third-quarter GDP growth was substantially revised upward, so we may learn in a few weeks that fourth-quarter growth was not quite as weak as the initial estimate indicates.

We should also remember that it is fairly common to miss on forecasts of quarter-to-quarter economic performance. For instance, it would not surprise me too much to look back and see that some of the growth we thought would occur in the final three months of last year was actually spread across the third quarter of 2005 - when GDP growth was stronger than expected - and the first quarter or two of this year.

Please understand that I am not suggesting we should be complacent about the weak statistic for fourth-quarter growth. I will be watching the incoming data very carefully over the next several months. In fact, the early data for January have been reasonably good.

Assuming the preliminary fourth-quarter report holds up, though, GDP still grew last year by 3.5 percent. For the year as a whole, it is clear that employment growth accelerated, business fixed investment was relatively strong, and core inflation remained subdued.

What about the outlook for 2006? Most forecasters are expecting another solid performance. Forecasts published by Blue Chip Economic Indicators, the Congressional Budget Office, and NABE economists generally call for real GDP to expand by roughly 3-1/4 to 3-1/2 percent this year. Housing investment is generally expected to slow, while business fixed investment is expected to increase. These forecasts call for interest rates, the unemployment rate, and core inflation to remain steady. I know that at your meeting last month, your three forecasters presented views that were largely the same."

So, even though preliminary data indicate that the economy didn't grow that much in the forth quarter of last year, the economy is still looking pretty strong according to the data that have so far been available for January of 2006.

If the economy is in fact growing and continues to grow in February and March, then an interest rate increase should be expected when The FOMC meets at the end of March.



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