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Rivlin: Fed to stay mute
Former Fed official sees central bank a long way from even mentioning a rate hike.
November 7, 2003: 1:34 PM EST

NEW YORK (CNN/Money) - The Federal Reserve is so far from raising interest rates they won't even hint at such a move at Tuesday's policy meeting, according to a former top Fed official, something that could be music to the ears of the bond and stock markets alike.

"They are not going to raise rates till probably next fall, if that, assuming that the recovery continues to gather momentum," said Alice Rivlin, one time vice-chair of the Federal Reserve, now an economist at the Brookings Institution.

In fact, Rivlin says the Fed at this point is not going to start laying the groundwork for rate hikes because the labor market is still not strong enough.

"They won't do anything to indicate they are ready to raise rates," she said. "That would be crazy in an economy that has so much slack and still has considerable unemployment and payrolls which are way below where they ought to be."

This is key. A lot of bond market handicappers think that the bond yields will shoot higher as soon as the Fed hints it's ready to start hiking short-term rates, the only part of the bond market it controls. And higher bond yields mean higher mortgage rates, higher borrowing costs for corporations, and potentially a drag on the U.S. economy. Higher bond yields could also trip up the bull market in stocks.

Like many other economists, Rivlin says she expects the Fed to say something positive about the labor market, given that in September it produced its first increase in jobs in many months.

It's true that the economy is set to post something like a 6 percent annual growth rate in the third quarter, stocks are in the throes of some kind of bull run with mergers heating up, and home sales remain very strong. These are all signs of a recovering economy.

And then there's the September durable goods report. This is an important leading indicator for manufacturing because it tallies up orders for big-ticket items like cars and computers and refrigerators. Transportation and defense orders were weak but other areas like machinery and electrical equipment were stronger. Dan Mecksroth at the Manufacturers Alliance says this shows capital spending is finally rebounding.

But there's still a ton of slack in the economy. Factories may see orders picking up, but in many industries they have lots of idle capacity. Unemployment is above 6 percent and if you count in the discouraged workers and others who gave up looking the rate tops 10 percent. Recent stories talk about workers losing friendly family incentives like flex time and telecommuting, an indication that in a weak labor market employers have the upper hand. Hard to see much upward "wage-push" pressure on inflation from the labor market.

Rivlin says the current large pool of unemployed people standing ready to come back into the labor force as the economy grows means "it will be a good long time before there's upward pressure on prices or wages."

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Right now the year-over-year core inflation rate (the annual increase in the consumer price index minus food and energy prices) is up just 1.2 percent! That's only two-tenths of a percentage point higher than the fed funds rate (the Fed's key short-term rate, their main policy lever) which is targeted at 1 percent. For monetary policy to be truly stimulative the funds rate has to be below the inflation rate and it is -- but not by much.

Some economists are concerned about a slight pick up in the core inflation rate recently. The six-month growth rate is running at 1.3 percent and the three-month growth rate is running at 1.5 percent. But the Fed has made it pretty clear it WANTS to see some more inflation in the economy, some more pricing power, some more grease for the wheels. Is this small pickup anything to get excited about?

Rivlin says no, noting that the Fed's policy statement lately has been more worried about too little inflation, not too much. "No one's really worried about inflation right now," she said.  Top of page


Kathleen Hays anchors CNN Money Morning and The FlipSide, airing Monday to Friday on CNNfn. As part of CNN's Business News team, she is also a regular contributor to Lou Dobbs Tonight.




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.