|
NEW YORK (CNN/Money) -
Bill Gross, managing director of the nation's top bond fund, says the Federal Reserve's rate-hiking days are numbered.
Pimco's Gross and some other economists say the gap between interest rates and the rate of inflation is the way to measure whether the fed funds rate is approaching a level that encourages growth, but keeps inflation under wraps.
They generally agree that a neutral number is around 2.75 percentage points higher than the rate of inflation. According to this math, with core inflation excluding food and energy running at about 2 percent, we're closing in on a neutral fed funds rate of about 4.75 percent.
That's versus a current fed funds rate of 3.75 percent following 11 straight rate increases by the Fed, starting June 30, 2004. Another quarter-point rate hike is considered a near certainty when the central bank's policy makers meet next Tuesday.
The fed funds rate is the Fed's main policy tool, a short-term rate the central bank sets that's a benchmark for short-term loans between banks. It also influences banks' prime rates charged to their best customers, as well as rates in the bond market and throughout the broader economy.
Bond dealers and investors are betting that Alan Greenspan will close his tenure at the Fed with three more rate hikes, including Tuesday's, that would take the overnight lending rate to 4.5 percent by the end of January.
And so, Gross and others argue, Bernanke, if confirmed, may have room to stop raising short-term rates once he succeeds Greenspan after the Maestro steps down Jan. 31, 2006.
But, of course, there is a counter argument that's making many bond investors nervous. (Full story.)
The overall consumer price index, including often-volatile food and energy, is rising at an annual rate of 4.7 percent, according to the latest government report, the highest level since 1991.
The disparity between inflation and core-inflation readings has started a debate over whether energy costs will eventually become embedded in wages and other prices. If they do, a neutral fed funds rate could be closer to 7 percent.
And if 7 percent sounds like a big jump, it's the sort of move that Greenspan knows well. When he became Fed chairman in August 1987, core inflation ran at about 3.7 percent, and the fed funds rate was more than 7 percent.
Greenspan briefly lowered rates after the October 1987 stock market crash, but when inflation rose to 4.3 percent by 1988 and he feared it would accelerate, he raised the fed funds rate to 9 percent.
Many economists believe he pushed the country into a recession in 1990 by hitting the brakes in 1988 and 1989. But his hawkish stance has also been credited with ushering in an era of low inflation and paving the way for the booming 1990s, the longest peacetime economic expansion in the nation's history.
------------------------
The bond market is nervous about Bernanke. Click here to find out why.
|
