The Economy

The Fed: To Raise Or Not To Raise

July 28, 2006

When the Federal Open Market Committee (FOMC), the Federal Reserve's monetary policy panel, meets on Aug. 8, the key question will be whether to raise the influential federal funds target rate. The rate, now at 5.25%, is the interest banks charge each ...

John McClenahen

Slow economic growth in the April-through-June quarter strengthens the case for the FOMC, after 17 consecutive quarter-point increases, to take a pause next month. The U.S. Commerce Department's first read of second-quarter GDP, released on July 28, showed the U.S. economy growing at an annual rate of just 2.5%, less than half the 5.6% rate for the first quarter of this year. Except for the 1.8% rate in the fourth quarter of 2005, the second-quarter's rate is the lowest since 1.2% in the first quarter of 2003.

On the other hand, inflation is probably higher than the FOMC likes. The so-called core PCE -- personal consumption expenditures minus food and energy -- increased at a seasonally adjusted annual rate of 2.9% in the second quarter of this year, its highest quarterly rate in three years.

What is clear is that consumer spending, which accounts for about two-thirds of all U.S. economic activity, slowed dramatically during the second quarter of this year. Growth fell to a seasonally adjusted annual rate of 2.5% in the April-through-June quarter, slightly more than half the first quarter's 4.8% rate. "Higher interest rates, higher oil prices and mounting debt are burdening consumers," says Peter Morici, a professor at the University of Maryland's Smith School of Business in College Park. "With the housing market cooling, consumers are no longer able to use the equity in their homes to finance ever larger purchases of clothes, electronics and other goods, and services."

Morici's bottom line: "Looking forward, consumer spending and housing construction will continue to moderate, and strong business investment will be needed to power the economy -- or the expansion will falter."

About the Author

John McClenahen | Former Senior Editor, IndustryWeek

John S. McClenahen, is an occasional essayist on the Web site of IndustryWeek, the executive management publication from which he retired in 2006. He began his journalism career as a broadcast journalist at Westinghouse Broadcasting’s KYW in Cleveland, Ohio. In May 1967, he joined Penton Media Inc. in Cleveland and in September 1967 was transferred to Washington, DC, the base from which for nearly 40 years he wrote primarily about national and international economics and politics, and corporate social responsibility.

      McClenahen, a native of Ohio now residing in Maryland, is an award-winning writer and photographer. He is the author of three books of poetry, most recently An Unexpected Poet (2013), and several books of photographs, including Black, White, and Shades of Grey (2014). He also is the author of a children’s book, Henry at His Beach (2014).

      His photograph “Provincetown: Fog Rising 2004” was selected for the Smithsonian Institution’s 2011 juried exhibition Artists at Work and displayed in the S. Dillon Ripley Center at the Smithsonian Institution in Washington, D.C., from June until October 2011. Five of his photographs are in the collection of St. Lawrence University and displayed on campus in Canton, New York.

      John McClenahen’s essay “Incorporating America: Whitman in Context” was designated one of the five best works published in The Journal of Graduate Liberal Studies during the twelve-year editorship of R. Barry Leavis of Rollins College. John McClenahen’s several journalism prizes include the coveted Jesse H. Neal Award. He also is the author of the commemorative poem “Upon 50 Years,” celebrating the fiftieth anniversary of the founding of Wolfson College Cambridge, and appearing in “The Wolfson Review.”

      John McClenahen received a B.A. (English with a minor in government) from St. Lawrence University, an M.A., (English) from Western Reserve University, and a Master of Arts in Liberal Studies from Georgetown University, where he also pursued doctoral studies. At St. Lawrence University, he was elected to academic honor societies in English and government and to Omicron Delta Kappa, the University’s highest undergraduate honor. John McClenahen was a participant in the 32nd Annual Wharton Seminars for Journalists at the Wharton School at the University of Pennsylvania in Philadelphia. During the Easter Term of the 1986 academic year, John McClenahen was the first American to hold a prestigious Press Fellowship at Wolfson College, Cambridge, in the United Kingdom.

      John McClenahen has served on the Editorial Board of Confluence: The Journal of Graduate Liberal Studies and was co-founder and first editor of Liberal Studies at Georgetown. He has been a volunteer researcher on the William Steinway Diary Project at the Smithsonian Institution, Washington, D.C., and has been an assistant professorial lecturer at The George Washington University in Washington, D.C.