Inflation Sits at Balance Point; Fed Sees Rise Likely as Drop, Expects to Keep Interest Rates Low

The Washington Times (Washington, DC), December 10, 2003 | Go to article overview

Inflation Sits at Balance Point; Fed Sees Rise Likely as Drop, Expects to Keep Interest Rates Low


Byline: Patrice Hill, THE WASHINGTON TIMES

The substantial improvement of the economy and job market seen in the past month prompted the Federal Reserve yesterday to say that inflation is as likely to rise now as it is to fall, though the Fed expects to keep interest rates at 40-year lows for some time to come.

Despite the more upbeat assessment by the central bank, the possibility of an uptick in inflation spooked the financial markets and thwarted an effort on Wall Street to push the Dow Jones Industrial Average over 10,000. After crossing the millennial mark after the open of trading, the Dow fell and ended down 42 points at 9,923.

"Output is expanding briskly, and the labor market appears to be improving modestly," the Fed's rate-setting committee said in a statement, adding that it sees no immediate threat of inflation. "Increases in core consumer prices are muted and expected to remain low."

But a subtle ploy by the Fed - withdrawing its previously stated concerns about the risk of deflation or "an unwanted fall in prices" that previously had led the central bank to cut interest rates - signaled to financial markets that the central bank has moved a step closer to raising interest rates, analysts said.

Rates shot up sharply in the bond market, with the yields on 10-year Treasury bonds jumping to 4.35 percent from 4.2 percent just before the Fed's statement, ensuring that 30-year mortgage rates, which are linked to the Treasury bond, will rise in coming days. Despite the higher rates, the dollar declined on worries that rates will not rise fast enough to bring back foreign investors who have been burned by low returns on their U.S. investments.

Thanks to the considerable improvement in the economy seen since the summer, the Fed has begun the long process of "unwinding its aggressively accommodative stance," said Joel Naroff, president of Naroff Economic Advisers. The Fed itself noted that the low level of rates it has maintained for several years is highly stimulative to the economy and should continue to promote growth for months to come. …

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