Mon, Jun 23, 2008 page10

• US Fed unlikely to hike rates, economists say

  • AFP
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  The tough talk on inflation from US Federal Reserve Chairman Ben Bernanke and his colleagues is unlikely to lead to a boost in interest rates — at least for now, economists say.

  Even as central bank officials step up hawkish rhetoric, base rates will likely be held steady at 2 percent at a two-day meeting starting tomorrow of the Federal Open Market Committee, most analysts predict.

  The Fed appears to be in a box with inflation pressures heating up even as the economy teeters on the brink of recession.

  The central bank has slashed rates since last September by 3.25 percentage points in an effort to fire up growth, but officials appear to be signaling that cycle of cuts is over and that inflation is now the biggest threat.

  “The Fed is approaching a danger point, in our opinion,” said Ethan Harris, senior economist at Lehman Brothers.

  “It is very unusual for it to contemplate hiking rates when the unemployment rate is steadily moving above its inflation-neutral level. Moreover, the rise in inflation expectations is clearly due to surging commodity prices, not an economic overheating,” he said.

  Cumberland Advisors chairman David Kotok said the Fed “will not raise interest rates this year, at least not until after the [presidential] election.”

  Kotok said the US economy was facing a commodity-driven inflation surge rather than a wage-driven push and that monetary policy would do little to check prices.

  “The energy price shock is not something that the Fed can control,” he said.

  Moreover, he said that because more consumer income was going to pay fuel bills, the effect of high oil prices was “deflationary, not inflationary.”

  Food prices would also see little impact from rate hikes, he said.

  He said the Fed would not want to risk being seen as interfering in politics during a presidential campaign and would most likely refrain from any major actions until after the election.

  “The Fed normally does not raise interest rates preceding a national election,” he said.

  “This time they are a beleaguered body and threatened by politics unlike in any recent period of history. Politics has injected a wild card into the Fed decision making. We expect that the Fed will stay on hold until after the election and keep its profile low in September and October,” he said.

  From a purely economic perspective, many analysts argue that conditions are too fragile for higher interest rates. The housing crisis remains in full swing and credit markets are still vulnerable to a shock, some argue.

  “If the Fed now regrets having lowered the federal funds rate while providing so much liquidity, might raising the federal funds rate now exacerbate the credit crisis and the recession? I think so,” Ed Yardeni at Yardeni Research said.

  Still, Bernanke and other Fed officials are signaling they will take steps to keep inflation expectations from getting out of control.

  Bernanke said earlier this month that any shift in public expectations in inflation could be self-fulfilling by prompting workers to demand higher wages and businesses to pass on price increases.

  “It’s high noon and Sheriff Bernanke is waiting with gun holstered, waiting for rapid inflation,” said Scott Anderson, senior economist at Wells Fargo. “The problem is he may actually have to do battle if oil prices do not recede or stabilize soon. I call this a problem, because I’m not sure if the town is ready for this event, so soon after Sheriff Bernanke had to chase off the financial market crisis gang from taking over the town.”

  Some say the Fed is trying to “jawbone” public expectations in what amounts to a bluff.

  “The Fed is now battling inflation expectations, not inflation itself,” Joel Naroff of Naroff Economic Advisors said. “The first step in that war is jawboning, which is going on like crazy. We will not likely see the next action, rate hikes, until late in this year at the earliest.”

  Naroff said economic data “do not tell us the economy has stabilized to the point where the Fed would have any cover to raise rates.”
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