Clouds Gather Over the Economy

I don't know about you, but I haven't been able to read a piece of economic news lately without the lyrics of Van Morrison's "Days Like This" getting stuck in my head. It's been a memorable week of economic news, so let's not waste any time. Here's the latest from the economic front.

Bernanke doesn't budge
The Federal Reserve left the key federal funds rate unchanged at 2% on Wednesday. The 2% rate -- what banks charge to lend to each other -- is less than half the current inflation rate, causing quite a stir for companies such as Dow Chemical (NYSE: DOW  ) and Kimberly Clark (NYSE: KMB  ) , both of which announced plans to raise prices this week. On the other side of the equation, banks such as Washington Mutual (NYSE: WM  ) and Wachovia (NYSE: WB  ) fell to their lowest levels in far more than a decade, amid further credit market fears and the prospect of higher interest rates as the Fed grapples with inflation.

Oil runs amuck
Oil broke the $140-a-barrel mark Thursday for the first time ever, setting off a new wave of fears regarding when, if ever, it'll end its historic climb. On the same day, OPEC President Chakib Khelil mentioned that he thought the price of oil could go as high as $170 in the coming months, but doubted it would breach the $200-dollar mark. Meanwhile, hedge fund manager Mike Masters, testifying before Congress, predicted that by regulating speculators, the price of oil could fall by half -- closer to the marginal cost of production.

Good news for banks ... maybe.
The Federal Reserve is mulling over rules that could make it easier for private equity funds to invest large sums in banks. Current rules stipulate that any entity owning more than 24.9% of a bank must register as a bank holding company, and any ownership beyond 9.9% triggers a wave of Federal scrutiny. By relaxing some of those limitations, private equity firms such as Blackstone (NYSE: BX  ) and Fortress Investment Group (NYSE: FIG  ) might be able to inject larger sums of much-needed capital into ailing banks desperate for liquidity.

However, such a move might end up backfiring, since private equity firms are well-known for managing companies for one purpose: selling them at a higher price. That could easily promote further havoc in an industry that's already wandering around like a drunken blind man.

I feel confident ... that we're in trouble
Consumer confidence slipped to its fifth-lowest level since ratings began in 1967, with one measure of future expectations hitting the lowest levels ever. Perhaps more troublingly, Americans on average expect inflation to come in at 7.7% over the next year, according to the Conference Board. Inflation expectations often become a self-fulfilling prophecy, because those who feel prices are bound to increase might chose to purchase goods now before prices go up in the future ... increasing demand and, yes, pushing prices higher.

Economy by the numbers

  • Average gas prices now stand at $4.066 per gallon.
  • Last week's initial jobless claims remained unchanged from the week before, with national unemployment hovering around 5.5%.
  • The Dow Jones Industrial Average is now down around 14% year to date, and off almost 20% from the highs reached last October.
  • 10-year Treasury notes now yield about 4%, down from more than 5% last summer, but still above the lows reached in March.
  • The U.S. dollar now fetches 0.637 euros, 107.657 Japanese yen, and .505 British pounds, down 14%, down 13%, and up 1% in the past year, respectively.

That's the latest for this week. Check back in next Friday for the latest economic roundup.

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Kimberly Clark and Dow Chemical are Motley Fool Income Investor recommendations. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.

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