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Bubbling us inflation boosts talk of fed rate rise Original Source Link: (May no longer be active)
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Bonds News
Bubbling US inflation boosts talk of Fed rate rise
Thu Apr 29, 2004 12:28 PM ET
By Victoria Thieberger
NEW YORK, April 29 (Reuters) - U.S. economic growth is chugging along but worries about rising inflation pressures have fueled expectations the Federal Reserve will push up interest rates in the next few months.
Preliminary results of a Reuters poll taken on Thursday, after the first quarter gross domestic product report showed a doubling of a key inflation measure, found more Wall Street economists are tilting towards a rise in the federal funds rate by September.
Although the economy grew at a less steamy than expected 4.2 percent pace in the first three months of the year, the Fed's preferred measure of inflation jumped to 2.0 percent. That index, the core personal consumption expenditures measure, rose by 1.0 percent during the four quarters of 2003.
"The Fed will view the report as evidence that inflation pressures have bottomed, while noting that it also points to a continuation of healthy real U.S. GDP growth," said Banc of America senior economist Peter Kretzmer.
Financial markets have fully priced in a quarter-point rate rise at the Fed's August rate-setting meeting, although markets had a similar view in early 2002 and the Fed ended up cutting.
Thursday's GDP report did little to change those expectations.
The U.S. economy is growing at a healthy pace, and some companies have taken advantage to raise prices for the first time in years. While the trend is not yet a concern for policymakers, they have noted it and are watching for any acceleration in price pressures.
IS PATIENCE STILL A VIRTUE?
The Federal Reserve is expected to continue laying the groundwork for an eventual rate rise at its May 4 policy meeting, by saying the risks on inflation are now "balanced", and perhaps dropping a reference to remaining "patient" on rate policy.
Inflation is back in the 1 to 2 percent range that several Fed officials have said is their preferred pace of inflation.
Mizuho Securities chief economist Bill Quan said the last two rate cuts the Fed made, taking the federal funds rate down to 1.0 percent, were billed as insurance easings against the risk of declining inflation.
"If you say that disinflationary pressures are no longer a concern, then you don't need the insurance any more," said Quan, who brought forward his expectation for a rate rise to August after recent comments by Fed Chairman Alan Greenspan that deflation fears were dead.
Indeed, some economists noted the pace of growth of the core PCE was back to where it was in mid-2002, before the last 0.75 percentage points of rate cuts from the Fed.
Still, others caution that until hiring grows convincingly, the Federal Reserve will be reluctant to take back even a little stimulus.
Complicating the timing of the first rate increase is the November presidential election, since many analysts believe the central bank will be reluctant to become a political target by changing interest rates in the weeks before or after the poll.
A still-sizeable number of Wall Street houses are forecasting the Fed will remain on hold into 2005, after the election fuss has faded and once it is clear the recovery is sustainable after the stimulus of the third round of tax cuts fades.
"The economy is in good shape, but certainly not in great shape," said Merrill Lynch senior economist Jose Rasco, who worries about what happens when the stimulus fades.
"If you look at all the stimulus that's been pumped into this economy, 4.2 percent isn't anything to write home about given all the money that's been spent."
© Reuters 2004. All Rights Reserved.
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