NEW YORK (CNNfn) - U.S. government bonds rose for a fourth trading day Wednesday on optimism that the U.S. economy will continue to grow at a pace that doesn't stoke inflation. Remarks from Federal Reserve Chairman Alan Greenspan, which reiterated the central bank's objective to keep inflation under control, also helped lift bonds.
"It has surprised all of us that the economy has performed so strongly, but we think that the accumulated influence of higher rates both in the market and by the Fed will begin to take a little bit of starch out of the economy," said Carl Tannenbaum, an economist with LaSalle National Bank in Chicago.
The benchmark 30-year Treasury bond rose 17/32 of a point in price, sending the yield to 6.59 percent from 6.63 percent late Tuesday. The yield on the 30-year bond has fallen more than 12 basis points this week; it rested at 6.71 percent on Jan. 10. (A basis point equals 1/100th of a percentage point.) The dollar was little changed against both the euro and the yen.
All about inflation
At issue in the bond market has been the fervent pace of the U.S. economy, and the possibility of accelerating inflation, which erodes the value of bonds' fixed principal and interest payments.
So far, little evidence of accelerating inflation has appeared. For all of 1999, prices rose at an annual pace of 2.6 percent, slightly higher than 1998 but nothing close to the double-digit inflation numbers of recent decades. At the same time, the economy grew at a 5.6 percent pace in the fourth quarter, one of its strongest showings of the decade.
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Still, bond investors are concerned that strong consumer demand at home and recovering economies overseas will continue to fuel the pace of the U.S. economy - about to enter its ninth year of uninterrupted expansion - fueling inflation and driving up short-term interest rates.
The tight labor market, as economists call it - where there are too many jobs for too few workers - is also threatening to fuel inflation, as companies are forced to pay their workers more to keep them on the job.
Anticipating a rate increase
To gauge all that, bond investors will be turning their attention to a key report on employment costs, now due for a revised release of 8:30 a.m. ET Friday. The report was initially slated to be released Thursday, but heavy snow in Washington closed federal government offices for two days, delaying the report's release by one day.
Analysts polled by Briefing.com expect employment costs - which include salaries, benefits and other compensation costs - rose 0.8 percent in the fourth quarter, the same pace that was registered in the third quarter.
The report, along with other recent economic data, will give investors a slightly more clear indication of what the Federal Open Market Committee under the guidance of Greenspan will do at its policy meeting slated to begin next Tuesday.
Most expect that Fed policy makers will ratchet up rates another quarter point to slow economic growth and ensure inflation remains in check. The Fed funds rate - the target for overnight loans between banks - currently rests at 5.5 percent.
Dollar little changed
Indeed, bond investors have already priced in a quarter-point move at the Feb. 1-2 meeting, according to the implied yield on the Fed funds futures contract. The yield on the February contract, which suggests where investors think the Fed funds rate will be at the end of next month, is 5.79 percent, a quarter point higher than its current level, indicating the market is expecting a rate hike. The April contract is currently 5.98 percent.
In the currency market, the dollar was little changed against both the euro and the yen, on expectations that any increase in U.S. lending rates may be limited. Higher rates typically make the dollar and securities denominated in it more attractive.
The euro was little changed at $1.0027 from $1.0012 in late trading Tuesday, while the dollar dipped to 105.73 yen from 105.89 on Tuesday. 
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