RealMoney Silver - One Factor Favors a Smaller Rate Cut

One Factor Favors a Smaller Rate Cut
By Tony Crescenzi
RealMoney.com Contributor
9/14/2007 11:46 AM EDT

When the Fed began cutting interest rates in January 2001, the capacity utilization rate of U.S. industry had fallen for eight months and was at 79.1%. Last month, the capacity utilization rate was at 82.2%, according to data released at 9:15 a.m. EDT today by the Federal Reserve.

The current level is the highest since last August and a percentage point above the 20-year average. The Fed can of course lower interest rates when the capacity utilization rate is high, but it is important to note that throughout the Fed's 2004-2006 rate hike cycle, the Fed repeatedly noted that high levels of resource utilization were putting upward pressure on inflation.

Moreover, the capacity utilization rate is now much higher than where it was when the Fed began its series of interest rate hikes in June 2004; the capacity rate then was 77.4%.

The continued high level of resource utilization hence favors a 25 basis point cut more so than a 50 basis point cut, even when accounting for the risk of a decrease in the capacity utilization rate.

Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market, first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

Read our conflicts and disclosure policy.