|
Is the Fed ready to hike rates?
|
 |
June 2, 1999: 7:09 p.m. ET
A growing number of economists see little choice but for Fed to raise rates
By Staff Writer Corey Goldman
|
NEW YORK (CNNfn) - If recent reports of unexpected strength in the nation's economy are any indication, the Federal Reserve is likely to raise interest rates sooner rather than later, analysts said Wednesday.
A rise in short-term rates would follow three rate cuts by the Fed late last year that were intended to insulate the United States from economic problems in Asia and elsewhere.
Now the central bank is facing a different problem: trying to ward off inflation after more than eight years of growth -- the second-longest expansion on record in the United States, marked by remarkably stable wages and prices.
Not if, but when…
"It's not so much a matter of if, but when rates will have to rise," said Carl Weinberg, chief economist at High Frequency Economics. "There's a distinct possibility that if we see more evidence of strong growth, the Fed will move sooner rather than later."
What could push the central bank toward raising rates are reports that the economy may still be growing too swiftly for its own good.
The evidence started with last month's report that consumer prices rose much faster than anyone had predicted in April. The Fed's policy-makers announced four days later that while they were holding short-term rates steady, they were now leaning toward raising them.
Then came Tuesday's report that manufacturing grew for the fourth straight month in May, indicating people at home and abroad can't get enough of that U.S. stuff, and Wednesday's new home sales, which came in much stronger than analysts had forecast. Strength in the housing market has been a key factor driving economic growth.
"It certainly looks like it's going to take one or two moves soon to slow things down," said Doug Porter, senior economist at brokerage Nesbitt Burns Inc. in Toronto. "We're definitely leaning toward the view that they'll raise rates soon."
Financial markets aren't waiting around to find out. Yields on 30-year Treasury bonds have jumped to 5.93 percent, the highest level in more than a year, while the Dow Jones industrial average has shed some 530 points, or 4.8 percent, since hitting a record 11,107.19 on May 13.
Earlier Wednesday, Federal Reserve Chairman Alan Greenspan steered clear of commenting on the outlook for U.S. interest rates, instead repeating his concern over waning U.S. support for free world trade.
"The United States has been in the forefront of the postwar opening up of international markets, much to our, and the rest of the world's, benefit," Greenspan said. "It would be a great tragedy were that process reversed."
Greenspan's remarks largely mirrored a speech he gave in Dallas in mid-April.
However, in a separate speech, Alfred Broaddus, the president of the Federal Reserve Bank of Richmond, said there is a risk that the U.S. economy could be overheating.
"The present expansion seems to be gathering additional steam," he told the Washington Association of Money Managers. "And there are no definite signs of a deceleration currently."
He said consumer confidence remains extremely high in the United States, aided by rising wages, a tight labor market and the booming stock market, which has many Americans feeling wealthier than they actually are.
"More fundamentally, while individual consumers obviously don't analyze national productivity growth trends in explicit detail, they are broadly aware -- partly because of the persistent strength in the stock market -- that their future income prospects are favorable and are therefore more willing to borrow against the future and buy bigger homes, better cars and so forth now," he said.
Where is the inflation?
Investors are clearly worried the economy's strength could at last lead to rising inflation as companies are forced to start raising wages to attract workers. Higher prices could soon follow.
Last summer's global turmoil prompted many economists to say slowing demand for U.S. goods abroad would slow growth at home, helping keep inflation at bay and prolonging the U.S. expansion. By the fall, however, things looked different. Asia's economic woes had spread to Latin America and much of Europe and looked poised to hit the shores of the U.S.
The Fed sprang into action, cutting rates three times, and the rate cuts worked. By January, the U.S. economy was back on track. Growth was strong, inflation tame and the global financial turmoil seemed to be under control. At that time, most economists were forecasting a gentle slowdown for the good ship U.S. economy.
No signs of slowing
But now the growing consensus is the world's biggest economy is not slowing down enough. Gross domestic product, the broadest measure of the nation's economy, grew at a surprisingly robust 4.1 percent rate in the first quarter, slower than the fourth quarter's 6 percent pace, but still faster than policy-makers have long believed was possible without triggering inflation.
And auto sales appear to be in high gear with domestic car makers reporting near-record traffic in their showrooms last month.
The next piece of the puzzle will be Friday's employment report, which will provide the first official glimpse of the economy's performance in May and insight into the job market.
If more evidence emerges that the economy isn't slowing on its own, Fed officials are likely to raise rates by year-end, perhaps as soon as their June 29-30 meeting, said Edward McKelvey, senior economist at Goldman Sachs.
While McKelvey believes inflation still poses little threat in the United States, he said he's been forced to admit the economy isn't slowing as much as he had anticipated. "The arguments we had at the beginning of the year for a slowdown haven't all materialized," he said.
Analysts surveyed by Reuters estimate the economy created 216,000 jobs last month, a bit slower than April's 234,000. The unemployment rate is seen holding steady at 4.3 percent.
"The unemployment report will be a big one," Nesbitt's Porter said. "An indication that job growth is still going gangbusters is going to make the market even more weary of a rate hike."
-- with additional information from wire reports
|
|
|
|
|
 |
|
