Fear of lurking inflation raises rate questions
By Barbara Hagenbaugh, USA TODAY
suggesting rising inflation have some economists wondering if
the Federal Reserve has kept interest rates too low for too long.
In a USA TODAY survey of 54 economists, one-third said U.S. interest
rate policy was "too easy." The survey was conducted
March 19-24, a few days before two reports added to other recent
data hinting at an increase in inflation. (Related: Results of
USA TODAY economists' survey.)
"I'm a little worried they are going to be
falling behind the curve," says Nariman Behravesh, chief
economist at Global Insight, an economic consulting firm.
Fed Chairman Alan Greenspan and his colleagues last
adjusted their target for short-term interest rates, which influence
borrowing costs across the economy, in June when they cut rates
to 1%, a 45-year-low. While one-third of economists surveyed expect
the Fed to raise rates in the next six months, the majority don't
expect a move until the end of 2004 or even into 2005.
But an increasing number of economists are starting
to question that strategy.
"The Fed needs to be a little pre-emptive,"
Fannie Mae chief economist David Berson says. "If they wait
to move and the economy continues to grow strongly, then there's
the potential for a pickup in inflation down the road."
Consumer inflation has been at 40-year-lows, forcing
the Fed to act aggressively to thwart further price declines.
But last week, the Commerce Department revised its estimate of
consumer inflation, excluding food and energy, in the fourth quarter
to a 1.2% gain, at an annual rate, from 0.7%.
While the report points to tame inflation, it suggests
prices are headed higher, not lower. A higher inflation rate is
bad because it makes decision-making for consumers and businesses
Fed officials say there is scant evidence of rising
inflation. Plus, with the job market soft, they would prefer to
err on the side of overstimulating the economy.
"They're willing to exchange a little inflation
for a little job growth," says Gary Thayer, chief economist
at A.G. Edwards. "Inflation is so low at this point, that's
probably not such a bad trade-off."
Inflation isn't the only concern. Low interest rates
have kept mortgage rates at historic lows, which has fueled strength
in the housing market. A small number of economists, including
Paul Kasriel at Northern Trust, are nervous the Fed is "aiding
and abetting" a housing market that might be getting too
strong, putting it at risk of a downturn. But most economists
predict the housing market will eventually level off, not crash,
when interest rates rise.
Bernanke says too low inflation can hurt economy
Gasoline Prices Sting Chain Store Sales
Guynn: Fed Rates Must Go Back to Neutral
High-tech outsourcing led to US job gains of 90,000 in 2003
IRS going after 'alarming' cheaters
Jobs data looms over confidence
5 NYSE Firms to Pay to Settle SEC Charges
Senate Panel Approves Bush's HUD Nominee
IRS nominee: Amount of unpaid US taxes unclear
Treasury Secretary John Snow says outsourcing can help economy
U.S. consumer confidence up for 2nd week
US lenders urge federal law on abusive lending
U.S. March Consumer Confidence Edges Lower
US Treasuries turn flat, mortgage-related sales cited