Economy Watch: Outlook for Monetary Policy Cloudy

Is the Fed planning to tighten monetary policy? Some of its member banks have been asking for a modest increase–25 basis points–in the discount rate lately, which would take that rate up to 1 percent. According to minutes of discount rate discussions released by the Fed on Tuesday, the banks of Kansas City and Dallas asked for such an increase at meetings in January, February and March.

The other member banks said no. While “the economic recovery was progressing,” according to the minutes, it wasn’t enough to spur the rest of the Fed to go along with the presidents of Kansas City (Hoenig) and Dallas (Fisher), both of whom have made a name as inflation hawks.

In an interview with Reuters on Tuesday, St. Louis president James Bullard said that the central bank hasn’t collectively decided how to proceed on tightening monetary policy. But he did note that a hike in interest rates might come at the same time as a sell-off of some of the assets the Fed has bought since 2008.

Gas prices hit consumer confidence

In yet another consumer confidence measure–the University of Michigan and the Conference Board reports will be out later this month–the IBD/TIPP Economic Optimism Index was down in early April, dropping to 40.8 from 43.0 in March. The index was based on a poll of 903 Americans from April 4 to April 10, with an index of 50 or more indicating optimism, while one in fewer than 50 pointing to gloomy attitudes.

All of the components of the index were down, including the six-month economic outlook and the personal financial outlook. Confidence in federal economic policies also lost ground, dropping 3.5 points to 35.5, a 12-month low.

“Over a short period of two months we have experienced an unprecedented erosion of 10 points in consumer confidence,” Raghavan Mayur, president of TIPP, a unit of TechnoMetrica Market Intelligence, said in a statement. “The high price for gasoline is the chief culprit. Seventy percent of Americans say they are affected by gasoline prices.”

Consumers plan to cut back

Indeed, a separate survey of more than 1,000 Americans by Delotte Consulting found that almost three-quarters of the respondents (74 percent) said that they’re going to respond to rising prices in the next few months by cutting back on spending. The survey, which was released on Tuesday, also found that a large minority (43 percent) still consider the U.S. economy in recession.

Among those respondents earning less than $100,000 a year, only 24 percent gained any confidence in the economy since this time last year. Roughly the same number (only 27 percent) thought that retailers were offering better deals this year than last. It’s a recipe for trouble for retailers not too far down the line.

Wall Street apparently worried a lot on Tuesday, perhaps about the price of oil or the situation in Japan, which the Japanese government admitted is getting worse, or at least no better. The Dow Jones Industrial Average lost 117.53 points, or 0.95 percent, while the S&P 500 was off 0.78 percent and the Nasdaq declined 0.96 percent.