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No Change in Federal Reserve Policy Likely, Good News for Stocks

Prof. Peter Morici - 5/11/2007

Today, the Labor Department reported the Producer Price Index rose 0.7 percent in April, after rising 1.0 percent in March. Energy prices rose 3.4 percent in April, after rising 3.6 percent the prior month. Food prices were up 0.4 percent in April, after rising 1.4 percent in March.

Core producer prices - producer prices less food and energy - were unchanged for the second month in a row. Over the last year, producer prices, including food and energy, are up only 1.5 percent. Businesses are managing to absorb higher energy prices and make decent profits through improvements in energy efficiency and general labor productivity.

Separately, the Commerce Department reported retail sales fell 0.2 percent in April and were up only 3.2 percent year over year.

The April decline in retail sales should be viewed together with the March jump of 1.0 percent. Cooler weather and higher gas prices discouraged spending in April but it is too early to call this a trend.

Overall the inflation and retail sales data indicate the economy is slowing but not tanking. The Federal Reserve remains worried about consumer price inflation, and we should not expect any significant sentiment for an interest rate cut to emerge.

Look for no change in Federal Reserve interest rate policy before at least September. GDP growth should pick up to about 2.2 percent in the second quarter, and accelerate in the second half. Gas prices will continue to rise but those should peak by early August.

Moderate growth and stable interest rates will further strengthen corporate profits and investor confidence. Corporate profits will continue to outperform the U.S. economy, because many large U.S. companies earn considerable profits in booming Asian economies.

A weaker dollar makes U.S. equities a particular bargain for foreign investors. Large U.S. multinationals, earning significant shares of their profits in Asia are a great play for European investors who sit on strong euros and pounds but have few good options at home.

Surging corporate profits, steady interest rates, and more robust demand from foreign investors should power up U.S. stock prices.

It's not too late to get in on the bull market.