UPDATE 1-Fed to raise U.S. rates, drama centers on words
Tue Mar 22, 2005 10:33 AM ET
(Recasts first paragraph, updates with FOMC meeting start, adds February producer prices data)
WASHINGTON, March 22 (Reuters) - The U.S. Federal Reserve was widely expected to lift interest rates on Tuesday to ward off inflation, but edgy financial markets will focus on what the Fed says, not what it does.
While economists see a seventh straight quarter percentage point hike in the federal funds rate -- to 2.75 percent -- as a given, financial markets were on alert for the possibility the Fed might change its language to signal bigger rises ahead.
The policy-making Federal Open Market Committee began meeting at 9:00 a.m. EST (1400 GMT) and should announce a decision at about 2:15 p.m. EST (1915 GMT) in a statement that will face close scrutiny for significant changes.
Just before the meeting, the Labor Department reported its Producer Price Index rose 0.4 percent in February, prodded by higher food and energy costs.
But so-called core wholesale prices -- which exclude food and energy -- rose just 0.1 percent after a month-earlier 0.8 percent gain, which had fanned inflation worries. Over the past 12 months, however, core producer prices rose 2.8 percent, most since a matching rise in the 12 months ended in November 1995.
On Wednesday, the department will release February data on consumer prices, the most widely known inflation gauge.
INFLATION ANXIETY
Though last month's core PPI reading was reassuring, markets still were anxious to see whether policy-makers would scrap a forward-looking pledge to keep lifting rates only at a "measured" pace -- wording adopted in May last year and taken as meaning modest quarter-point rises.
Still, a poll on Friday by Reuters found just two of 19 big Wall Street firms saw a strong likelihood the Fed will jettison the "measured" language on Tuesday -- a move that would be a necessary prelude to larger rate rises.
Hefty oil prices backed off on Tuesday after topping $57 on Monday, but remained within striking distance of record levels. That, coupled with signs of upward pressure on prices has raised concern in some quarters about the risks of inflation.
WHEN, NOT IF
"I don't disagree that the Fed will at some point change the 'measured' language," said senior economist Anthony Chan of JPMorgan Asset Management in Columbus, Ohio.
"But I don't necessarily think they need to change it now because both the CPI (Consumer Price Index) and the core CPI (consumer prices excluding food and energy costs) are below levels in prior expansions," he added.
The Fed began moving the fed funds rate up in June last year from a 46-year low of 1 percent and has steadily ratcheted it up since then.
Merrill Lynch economist David Rosenberg on Monday cited 10 reasons why he felt the economy was not on the cusp of troublesome inflation.
He cited muted wage pressures that have made the labor market "a key source of disinflation" and considerable slack between current level of economic activity and its potential.
The Fed's goal is to move the fed funds rate to a "neutral" level, which neither crimps growth nor fosters inflation. Economists see that as between 3 and 5 percent -- or about 2 percentage points above inflation -- although policy-makers are loath to pinpoint a figure.
Chan said policy-makers at some point will signal the end of "accommodative" rates and measured rate rises.
"They will change the 'measured' language at some stage this year," Chan said, but he did not think the time has arrived.
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