March 25, 2006
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Posted on Sat, Mar. 25, 2006
The San Jose Mercury News
More rate hikes expected, at least over short term
Knight Ridder
WASHINGTON – Federal Reserve Chairman Ben Bernanke presides Monday over his first meeting to set interest rates. Taking a cue from Alan Greenspan, his long-serving predecessor, he’s already signaled that a 15th consecutive rate increase is coming.
Everyone expects Bernanke and the Fed’s policy-making body, the Open Market Committee, to raise its benchmark short-term loan rate by another quarter-point, to 4.75 percent, when its two-day meeting ends Tuesday. That will prompt banks to raise their lending rates similarly for consumers and businesses.
Why all the fuss, then, if everyone knows what’s going to happen?
Many analysts hope the Fed’s statement after the meeting will signal that the tight-money policy, which dates back to June 2004, will draw to a close in the next few months, ending the squeeze on borrowing that’s costing consumers and businesses.
Bernanke took the Fed’s reins Feb. 1, succeeding the often opaque Greenspan, who led the Fed for nearly 19 years. Bernanke, a former Princeton University professor, is already making his mark as a better communicator.
The new Fed chairman was as clear as daylight this week when he dismissed concerns that the bond market may be foreshadowing an economic slowdown or recession. He said Monday that he expects healthy economic growth to continue, a stance that suggests that at least one or two more rate increases are coming.
Here’s why: Given today’s strong economy, the Fed considers rising inflation a greater threat than the economy stumbling under the pressure of higher loan rates. Better to be tougher on inflation than have it sneak up unexpectedly, because once inflation’s on the rise, it’s much harder to tamp down.
“We know from history that expectations about inflation tend to be self-fulfilling,” said Victor Li, an economics professor at Pennsylvania’s Villanova University and a former academic colleague of Bernanke. “There’s the need for the Fed to establish credibility, that they’re going to control inflation.”
Many economists believe that core inflation — the rise in prices excluding volatile food and energy prices — is likely to increase later this year. They point to high commodity prices that tend to pass through the entire manufacturing chain. And they point out that the nation is near full employment, making workers scarce and forcing companies to pay more to attract or keep labor. That’s called wage inflation.
David F. Seiders, chief economist for the National Association of Home Builders, cited those concerns when he said a slowdown in U.S. economic growth is necessary and likely to begin later this year and last into 2007. Seiders thinks the Fed “firmly believes that upward pressures on inflation are building below the surface, and further rate increases by the central bank are likely next week and again in May.
James Paulsen, chief investment strategist for San Francisco-based Wells Capital Management, expects core inflation to inch toward 3 percent later this year. That’s the upper limit of the Fed’s comfort zone.
“Although by standards of the last 35 years, such an inflation rate hardly seems alarming, it will likely keep the Fed tightening interest rates for much longer and much higher than most now anticipate,” he wrote Tuesday.
