Newspaper article The Christian Science Monitor

Wall St. Cheers Tame Prices; Will Fed Hold Rates Steady?

Newspaper article The Christian Science Monitor

Wall St. Cheers Tame Prices; Will Fed Hold Rates Steady?

Article excerpt

Higher gasoline prices helped push consumer prices up 0.4 percent in April. But excluding energy and food increases, consumer prices, as measured by the Consumer Price Index, hardly budged last month.

Wall Street was closely watching the CPI numbers, as well as April retail sales, which fell 0.3 percent.

"These were very favorable numbers," says John Burgess, managing director of global investments at Bankers Trust Company in New York. Yet he doubts the numbers will settle the growing economic disagreement among economists over the future direction of interest rates. "These inflation numbers are lagging indicators," he explains.

Robert Dederick, a consulting economist at Northern Trust Company in Chicago, says the latest economic numbers will keep the Federal Reserve on the sidelines when it meets on May 21.

"These reports did not indicate the Fed will have to tighten," he remarks.

Still, some economists believe the Fed will raise interest rates on July 3. Mr. Burgess says he would not be surprised to see the Fed "tighten once or twice more during the year." Some economists maintain the tightening could be significant as the world economy starts to perk up. If US exports soar, wage and price pressures could build up.

A smaller group of economists predicts the economy will start to lose steam. They argue that the higher growth in the first half of this year will steal growth from the second half. Already, auto company executives are predicting slower sales later in the year. April retail sales indicated a slowing last month. Some economists predict an economic downturn next year.

"These numbers will not settle that argument," Mr. Dederick says.

In early trading on May 14, the bond and stock markets moved higher on the inflation news.

Despite the stock market's optimism, some economists worry about inflation trends. "My own feeling is that the fundamentals are deteriorating gradually as the year goes on," says Lyle Gramley, an economist at the Mortgage Bankers Association, Washington.

What direction rates take in coming months will be vital to everyone from businesses to home buyers and mutual-fund shareholders. Already this year, rising rates have hurt investors in bond funds, for example.

Given the Fed's inflation-fighting mission, price pressures are a key to the the interest rate outlook.

Mr. Gramley, a former Federal Reserve governor, is not worried about the rise in energy prices. So far this year, a significant portion of the inflation rise can be traced to higher energy prices - the result of low inventories, a harsh winter, and a stronger recovery. …

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