FED WATCH: Looking For Clues, Just Like Everybody Else

NEW YORK (Dow Jones)--Federal Reserve officials are finding themselves in the same boat as private sector economists as they try to figure out where the economy's heading.

In a limited number of speeches since the conclusion of the major fighting in the Iraq war, several Fed policy makers have said they're hopeful better days lie ahead for the economy.

Speaking in New York on Tuesday, Richmond Fed President Alfred Broaddus and St. Louis Fed President William Poole, the former a voter on the Federal Open Market Committee, were also equally hesitant to say how strong that growth is likely to be. They added that they'll be as interested as anybody else in determining how much of the recent economic doldrums are war related and how much are fundamental in nature.

The conclusion they reach is critical because it will drive what comes next with interest rates. Most Fed watchers believe the recent downturn of economic data was due to uncertainty over the war. As a result they believe the Fed will be able to dodge cutting interest rates again.

But to the those who say the economy's problems go deeper than consumers and businesses cutting back in the face of war, there's a good chance the Fed will indeed have to lower rates from the current 1.25% fed funds target. Given the rock bottom funds rate that would prevail under such circumstances, those economists argue it's possible the Fed would resort to buying long-dated Treasurys to push longer rates down, in a last ditch bid at economic stimulus. . . No Guarantees .

Fed watchers said the primary virtue of this week's central bank commentary was that it encapsulated the dominant economic view of Wall Street in the week just after the end of the primary and most heated phase of the Iraq war.

"I cannot guarantee that the modest economic growth rate of last year will continue without interruption, but I do think that is the most likely outcome," Poole said as part of an address before a conference of the Levy Economics Institute.

Broaddus concurred and went one step further, telling reporters that "I believe the successful resolution of the war and at least the reduction of a significant amount of uncertainty, is going to be a big plus." The FOMC voter added "we'd like to see faster growth in employment and production."

Jim O'Sullivan, an economist with UBS Warburg in Stamford, Conn., said of the Fed officials' remarks drove a sense that the Fed is on hold. "In general, they were conveying a reasonably upbeat view of the world, with the caveat that there's some near term uncertainty."

Indeed, a blast of strong March retail sales data on Friday prompted some banks to back away from expectations the Fed would have to cut rates again. The strength of the report was particularly helpful because it captured activity right before the war, a development that augers well for post war performance.

But that encouraging data was followed Tuesday by dismal factory sector statistics - including a very weak report on manufacturing report in the New York area, although some economists dismissed these as unfortunate but backward looking numbers.

The Fed officials warned that just like private sector economists, they'll be faced with a not trivial time lag before they get data that covers the post war period.

Broaddus said that as he seeks to separate the impact of war uncertainty from the economy's true status, "I'll be particularly interested in indicators of business spending," as shown both in statistics and through anecdotal reports.

Both Poole and Broaddus said they'd also be relying a lot on anecdotal information gathered from within their districts, given how long it will take to get solid post war data.

-Michael S. Derby, Dow Jones Newswires; 201-938-4192; michael.derby@dowjones.com .

And in other news...

Dollar Sinks As Investors Seek Better Yields

By Robert Flint of Dow Jones Newswires

NEW YORK (Dow Jones)--The dollar sank Wednesday afternoon as investors dumped the greenback in search of better yields abroad.

By mid-afternoon, a gentle retreat had turned into a rout, with the dollar substantially below day-earlier levels against the euro, yen and Swiss franc.

No startling news touched off the slide, analysts said. Instead, the dollar's losses reflected skepticism about the U.S. economy and a growing trend among investors to seek higher returns outside the U.S., especially after the U.S. currency failed to catch a real rally as military action drew to an end in Iraq.

"Until there is more convincing evidence that the economy is turning around, people will be reluctant to put a lot of money in U.S. stocks, bonds and the dollar," said Rebecca Patterson, global currency strategist at JP Morgan in New York.

Thin volume ahead of the Passover and Easter holidays may also have exaggerated movements in foreign-exchange markets, as traders noted the euro also surged against the yen, hitting a multi-month high around Y130.70 before sinking back to Y130.25 mid-afternoon.

Around 2:15 p.m. EDT (1815 GMT), the euro was at $1.0903, up nearly a cent from $1.0810 late Tuesday. Against the yen, the dollar was at Y119.38, down sharply from Y120.10 late Tuesday. Against the Swiss franc, the dollar was trading at CHF1.3730, down more than 1.5 francs from CHF1.3896 a day ago, while sterling was trading at $1.5743, up from $1.5713 late Tuesday. .

(MORE) Dow Jones Newswires

04-16-03 1424ET- - 02 24 PM EDT 04-16-03

(Deep in a government conference room..)

Gentlemen! What are we going to do about the economy?

(a quiet voice from the back of the room…)

Sir? We could look at what has historically worked at improving the economy and try doing that.

Well? Don’t keep us in suspense! What has historically worked to improve the economy?

Reduced taxes, sir. Reduced government bureaucracy. Less government regulation.

Reducing taxes and government bureaucracy has improved the economy?

Yes sir. Every time it’s been done. It seems as if the more they are reduced the better the economy does.

Gentlemen! We’ve got to protect our phony baloney jobs! (and a tip of the hat to Mel Brooks) What are we going to do about the economy?

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