Fed Chairman Ben Bernanke and his colleagues open a two-day meeting Tuesday afternoon, where they will put together their most up-to-date assessment of the economy's outlook and decide the best course on interest rates.
The Fed is almost certain to hold its key interest rate steady at 2 percent when it wraps up its session on Wednesday. If that's the case, the prime lending rate for millions of consumers and businesses would stay at 5 percent. The prime rate applies to certain credit cards, home equity lines of credit and other loans.
Looking ahead, the Fed probably will go further in highlighting inflation risks but won't go as far as to signal a rate increase at the Fed's next meeting on Aug. 5, analysts said.
However, if energy and food prices do show signs of spreading inflation through the economy, a rate increase at that time or later this year can't be ruled out, they said. Some Wall Street investors are betting that will be the case.
Given the shaky economy, the deep housing slump and record-high home foreclosures, many economists believe the Fed would prefer to leave rates where they are through the rest of this year and then begin to boost them in 2009.
Fed policymakers face tough choices. There have been signs of divisions within their ranks about the best way to handle the economy. Boosting rates too soon to fend off inflation will hurt economic growth. On the other hand, Fed officials have made clear they aren't inclined to cut rates again for fear of aggravating inflation.
United Parcel Service Inc (UPS.N)
shares fell 4.6 percent on Tuesday to their lowest point since
late 2003, the morning after the world's largest
package-delivery company cut its second-quarter profit outlook
citing high fuel costs and a weak U.S. economy.
UPS's announcement came just a week after main rival
Memphis-based FedEx Corp (FDX.N) posted a quarterly loss and
gave a weak profit outlook for its fiscal 2009. The two
companies are seen as bellwethers of the U.S. economy due to
the large volume of commercial and consumer goods they
The warning, which weighed on U.S. stocks, was the latest
sign that corporate America could no longer brush off surging
energy prices. Crude oil prices have roughly doubled over the
UPS shares dropped $3.06 to $63.20. FedEx was down $1.38,
or 1.7 percent, at $78.75. Both companies' shares trade on the
New York Stock Exchange.
The Dow Jones transportation index, which also includes
airlines and railroads, was down 1.3 percent.
"UPS's preannouncement underscores the growing problems
facing parcel carriers," Morgan Stanley analyst William Greene
wrote in a note for clients. "The domestic segment,
particularly air, has struggled with higher fuel prices, and
fundamentals seem to be deteriorating further. However, UPS is
also now seeing slowing international volumes for the first
time, a key source of growth over the last few years."
After the Atlanta-based company's announcement, Lehman
Brothers and R.W. Baird & Co lowered their price targets on
UPS's stock, and Baird downgraded the company to "neutral" from
"We continue to like the long-term prospects of UPS, but we
have grown increasingly concerned about shippers' price
elasticity of demand as fuel surcharges for domestic express
are hitting record levels for the overall industry," Baird
analyst Jon Langenfeld wrote in a note for clients.
Like other major companies in the U.S. transport sector,
UPS passes on higher fuel costs to customers. But as BB&T
Capital Markets analyst John Barnes wrote in a note to clients,
"fuel prices may have reached a tipping point at which many
shippers are simply unwilling to pay the higher fuel
"We believe both factors may put significant downward
pressure on (earnings per share) over the next several
quarters." Barnes added.
Late Monday, UPS said it expected to earn between 83 cents
and 88 cents per share in the second quarter, down from a
previous range of 97 cents to $1.04.
In a statement, the company said U.S. package volume had
been lower than expected, while demand for higher-priced air
delivery services had seen a particular drop.
UPS also said that the "anemic U.S. economy is negatively
impacting volume into the United States, affecting results for
the international segment."
In recent quarters, strong international package demand has
helped both UPS and FedEx offset lower growth in their domestic
services as U.S. economic growth has slowed.
With Tuesday's drop, UPS shares are down 10 percent so far
this year, while FedEx is down 12 percent. The transportation
index is up 10 percent.
(Reporting by Nick Carey, additional reporting by Scott
Malone in Boston; Editing by Maureen Bavdek)
Consumer confidence fell in June to
its lowest in 16 years as high inflation continued to sap
confidence and pushed expectations for the future to a record
low, the Conference Board said on Tuesday.
The Conference Board, an industry group, said its inflation
expectations gauge matched the record-high 7.7 percent it hit
in May, which will keep Federal Reserve policy makers concerned
over price growth as they meet to decide rates on Tuesday and
The Conference Board said its overall monthly measure of
consumers' mood declined to 50.4 this month -- the lowest since
47.3 in February 1992 -- from a revised 58.1 in May. May's
reading was originally reported at 57.2.
Economists on Wall Street had been expecting a reading of
56.4, according to a Reuters poll. Their forecasts ranged from
50.0 to 60.0.
The index has now dropped by more than half since last
July, when it was at 111.90. Since then, housing market
troubles triggered the most severe credit crisis in at least a
Consumers made a grim assessment of their present situation
and their future prospects. The present situation index dropped
to 64.5 from a revised 74.2 in May. The expectations barometer
slid to an all-time low of 41.0 from a revised 47.3 in May.
(Reporting by Burton Frierson; Editing by Theodore