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Fed only central bank raising rates Original Source Link: (May no longer be active)
http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_berry&sid=aATI1sufRonEhttp://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_berry&sid=aATI1sufRonE
John M. Berry is a columnist for Bloomberg News. The opinions expressed are his own.
Fed Is Only Central Bank Raising Rates: John M. Berry (Correct)
(Corrects timing of Australian rate cut in sixth paragraph. Commentary. John M. Berry is a Bloomberg News columnist. The opinions expressed are his own.)
By John M. Berry
July 1 (Bloomberg) -- The U.S. Federal Reserve now stands as the only central bank in an industrial country whose policymakers still believe it needs to continue steadily raising its interest rate target to make sure inflation stays under tight control.
Fed officials raised their target for the overnight lending rate by another quarter-percentage point yesterday, to 3.25 percent up from only 1 percent a year ago. And with the officials expecting solid economic growth to continue into 2006, there is every likelihood they will raise the target several more times before the year is out.
The different policy outlook at the Fed underscores just how much better the U.S. economy is performing than most of those in the rest of the industrial world.
That's all to the good as far as creating jobs for unemployed workers is concerned. Unfortunately, it also suggests that the faster growth will cause the already burgeoning U.S. current account deficit to swell to ever more dangerous levels.
Norges Bank, the central bank of Norway, also raised its rate target by a quarter-point yesterday, to 2 percent. On the other hand, bank officials also said that sluggish growth in most other European countries meant any further increases would be much slower in coming than had been planned.
In March, the Reserve Bank of Australia also raised its target by a quarter-point, to 5.5 percent. No change is expected at a policy making session next week. The RBA governor, Ian Macfarlane, has noted recently that growth has slowed and that inflation pressures haven't increased as fast as expected.
Others Cut Rates
Meanwhile, amid signs of sharp cutbacks in consumer spending, some of the policymakers at the Bank of England dissented last month in favor of a rate cut.
The European Central Bank hasn't changed its 2 percent target for two years even though some politicians are clamoring that it should cut rates to spur growth in its 12-nation domain. So far ECB officials aren't budging.
On June 21, Sweden's Riksbank did just that, slashing its target by a surprising half-percentage point, to 1.5 percent. Some other European central banks, including those of Poland, Hungary, Bulgaria and the Czech Republic, have also recently cut their rates.
Yesterday's announcement that the Federal Open Market Committee had raised the target for the overnight lending rate for the ninth time in a row, to 3.25 percent, came as no surprise. As usual, Fed Chairman Alan Greenspan and many of his colleagues had signaled in speeches and congressional testimony that it was on the way.
An Open Door
Furthermore, the wording of the announcement, which was little changed from the one issued after the previous committee meeting in early May, left the door wide open for more increases.
``The committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with the robust underlying growth in productivity, is providing ongoing support to economic activity,'' the announcement said. And it added, ``With underlying inflation expected to be contained, the committee believes that policy accommodation can be removed at a pace that is likely to be measured.''
At what point will the target be high enough that monetary policy is no longer ``accommodative'' and no longer ``providing ongoing support to economic activity?'' No one really knows.
Nevertheless, it seems a unanimous view among Fed officials --- or at least very close to unanimous --- that the first digit of that number is much more likely a four than a three.
Moreover, the language in yesterday's committee statement stressed that growth remains ``firm and labor market conditions continue to improve gradually.'' Then came the kicker: ``Pressures on inflation have stayed elevated, but longer-term inflation expectations remain well contained.''
No End in Sight?
Economist Stuart Hoffman of PNC Corporation reacted to those words this way:
``The bottom line is that there is NO signal or even a hint from the FOMC that they feel their tightening is over or even close to being over.''
One of the things the committee did at its two-day meeting was to share and discuss the individual participants' economic forecasts for the rest of this year and for 2006. Those forecasts will be made public on July 20 when Greenspan gives his semi- annual monetary policy report to the House Financial Services Committee.
It seems highly likely that the GDP growth forecast will center at about 3.5 percent to 3.75 percent annual rates for the second half of this year. So long as it appears that sort of forecast is on track, and so long as inflation pressures do not abate significantly, Fed officials will keep raising their target.
Slower growth in Europe, and the continuation of hardly any growth in Japan, simply won't be much of a factor. That slow growth will mean that the market of U.S. exports is going to remain mostly in the doldrums, and therefore that trade will remain a drag on U.S. growth.
That expectation will already have been built into the forecasts put on the table at the Fed meeting.
The Reminders
The slower growth abroad also means a couple of other things. One is that as the Fed keeps raising its rate target, yield differentials at both ends of the curve increasingly will favor investments in this country and therefore lend support to the value of the dollar. And that in turn will only tend to widen the trade deficit further.
As U.S. yields rise, so does the rate of return on foreign investments in the U.S., particularly those in shorter-term instruments such as Treasury bills or two-year notes. As that happens, the small surplus on net investment income will erode.
Those factors rightly carry a lot less weight with Fed officials than keeping the U.S. economy growing in a non- inflation way. Still, they are reminders that a potentially dangerous long-term problem is getting steadily worse.
Last Updated: July 1, 2005 02:29 EDT
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