Transcripts

Consumer Lack of Confidence in the Economy

SUZANNE PRATT: Wall Street was in watch and wait mode today, awaiting word tomorrow from the Federal Reserve on interest rates. As Fed policymakers began their two-day meeting, there was more troubling news on the economy. The Conference Board's consumer confidence index fell to 50.4 in June, from just over 58 in May. That puts confidence at its lowest level in 16 years. As Scott Gurvey reports, experts say the state of the economy has the Fed in a tough spot.

SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Today's big drop in consumer confidence is simply proof of something most of us have been feeling for some time, stuck between a rock and a very hard place. Today Dow Chemical announced price increases on all its products of as much as 25 percent, this on top of an increase of 20 percent less than a month ago. While you may not do business with it directly, Dow products could be in almost anything you buy from plastics to plant seed, paint to pharmaceuticals. Dow says its price increases are necessary to offset what it calls the continuing relentless rise in the cost of energy and hydrocarbons. Economist Kathleen Stephansen of Credit Suisse says these increase put pressure on the Federal Reserve.

KATHLEEN STEPHANSEN, ECONOMIST, CREDIT SUISSE: The rise in commodity price inflation which essentially pushes headline inflation up is really here, the core of the problem in the sense that the Fed is very worried about that headline inflation translating into much broader based type of inflation, so that core inflation will go up. And in order to prevent the second round effect if you will, the Fed has started to be somewhat more hawkish.

GURVEY: The problem for the central bank is that the traditional remedy for inflation, higher interest rates, could have a devastating impact on an economy already sluggish at best. With unemployment rising, wages have been stagnant and our sense of personal wealth is falling. Today the Case-Shiller home price index showed home values fell more than 15 percent in the past year. They are now at levels last seen in 2004. The Federal Reserve is required by law to encourage full employment. But it is also required to keep prices as stable as possible. Economist Michael Feroli of JPMorgan notes there are times, like the present, when these two goals conflict.

MICHAEL FEROLI, ECONOMIST, JPMORGAN: So far they've done a good job I think with a really challenging set of circumstances here in terms of the housing slowdown and rising energy prices sort of pulling at both ends of their mandate. I guess the question is going forward can they keep that balancing act maintained? Like I've said so far I think they've done a good job with a bad situation, but the deeper challenges I think lay ahead.

GURVEY: Fed watchers expect the open market committee to leave rates unchanged when it wraps up its two-day meeting tomorrow. But everyone is on edge waiting to see the statement which may give clues as to policy plans for the rest of the year. Scot Gurvey, NIGHTLY BUSINESS REPORT, New York.