Raymond James’ Scott Brown: Fed might raise discount rate again

The following is a daily market commentary by Scott J. Brown, chief economist and senior vice president of equity research at Raymond James & Associates Inc.
Monday: A late afternoon rally helped the DJIA into positive territory, but most stocks finished lower. The economic data, reasonably close to expectations, had little impact.
Industrial production figures and the New York Fed’s factory sector survey were each a bit better than expected, and the financial markets showed little reaction. Homebuilder sentiment was weaker than anticipated, but wasn’t much of a shock in hindsight. The markets also showed little reaction to Senator Dodd’s proposal for financial sector reforms.
Add to the calendar: Fed Chairman Bernanke and former Fed Chairman Paul Volcker will testify before the House Financial Services Committee at 2 p.m. on Wednesday. The topic is “Examining the Link Between Fed Bank Supervision and Monetary Policy.” Bernanke is not expected to discuss the economic situation or the current stance of monetary policy, but will likely emphasize that a larger bank supervisory role would be helpful in monetary policy decision-making. (View economic releases.)
The New York Fed’s Empire State Manufacturing Index edged down in March, but remained relatively strong. New orders and shipments rose at a faster pace. Employment growth picked up. Input price pressures were moderately high, but firms generally had little success in raising prices of finished goods. The six-month outlook remained optimistic.
Industrial production rose a bit more than anticipated in February. The headline figure was boosted by a 2.0% increase in mining and a 0.5% increase in the output of utilities. Manufacturing output fell 0.2% (+2.0% y/y), with mixed results across industries (autos down 4.4%, vs. +5.2% in January). Capacity utilization edged up 0.2 percentage point, to a rate 7.9 percentage points below its 1972-2009 average.
The National Association of Home Builders Housing Market Index fell in March, with declines in evaluations of current and future sales conditions and the traffic of prospective buyers. Poor weather was likely a factor (along with tight credit, a weak labor market, and the continued flow of distressed properties).
Retail gasoline prices edged up again in the latest week (+44.7% y/y), at the highest level since October 2008.
Today: The focus will be on the wording of the Fed’s policy statement. While no significant change is anticipated, the markets may be wary ahead of the announcement. (View today’s releases.)
Import prices are expected to have fallen last month, with downward pressure from lower petroleum prices. Ex-oil, import prices are likely to have been mixed, with some pressure in raw materials, but little inflation in imported finished goods.
Residential construction figures for March are likely to reflect some impact of heavy snow, although following the drop in homebuilder sentiment, there are plenty of other factors restraining construction activity besides the weather.
The Federal Open Market Committee is widely expected to leave the federal funds target range unchanged, at 0% to 0.25%, and the FOMC is likely to retain the “extended period” language (although there may be one or two dissenters). The wording of the economic assessment should be about the same as the previous statement (the Fed’s Beige Book noted modest improvement in most areas). There’s some chance that the Fed’s Board of Governors will raise the discount rate again, but there’s probably no hurry (moreover, this should be viewed as part of the normalization of monetary policy, not a tightening of credit for consumers and businesses).
For more commentaries by Dr. Brown, go to rjcapitalmarkets.com/eco_commentary_240_main.asp.