Tame Inflation Keeps Rate-Cut Option Open
Tuesday April 17, 5:38 pm Eastern Time
By Glenn Somerville
<<WASHINGTON (Reuters) - U.S. consumer prices rose at the slowest rate in seven months during March as energy costs softened while manufacturing perked up modestly, according to separate reports on Tuesday that still showed ample room for the Federal Reserve to trim interest rates.
A series of government and industry reports implied some stability was returning to a few economic sectors after a volatile first quarter that recorded soaring natural-gas prices and a virtual recession in many manufacturing industries.
Analysts said it meant the U.S. central bank was unlikely to chop interest rates again between its regular policy-setting sessions but was nearly certain to do so at its next scheduled Federal Open Market Committee meeting on May 15.
A sharp boost in U.S. new-car assemblies pushed industrial production up 0.4 percent in March -- its first increase in six months -- after a 0.4 percent fall in February, the Fed said.
Nonetheless, output for the entire January-March first quarter was off 4.7 percent, the weakest performance since the first quarter of 1991 just as the last recession was ending.
Prices measured by the widely watched Consumer Price Index edged up a scant 0.1 percent last month after a 0.3 percent February gain as energy prices fell 2.1 percent, the Labor Department said. It was the smallest gain in consumer prices since a matching 0.1 percent advance last August.
Excluding food and energy, so-called ``core'' inflation in March was ahead 0.2 percent following a 0.3 percent rise in February.
Gasoline prices fell 3.8 percent in March, more than reversing a 1.2 percent February increase. But relief at the gasoline pumps may prove temporary since prices have climbed again in April, hitting a 9-1/2-month high on futures markets of $1.0505 a gallon on Tuesday according to New York Mercantile Exchange figures.
MEDICAL COSTS SOARING
Economist Joel Naroff of Naroff Economic Advisors Inc. in Holland, Pa., noted some prices were still climbing sharply including medical care costs and telephone bills but said that would not keep the Fed from trimming rates further.
``The slow economy is the war that has to be fought and at least for now, the FOMC can push inflation to the back burner,'' Naroff said.
The central bank has cut its benchmark overnight lending rate a total of 1.5 percentage points in three moves already this year -- including one move between meetings.
The favorable inflation report helped financial markets shake off profit worries and eke out slim gains on the likelihood of cheaper credit ahead.
The Dow Jones industrial average ended up 58.17 points at 10,216.73 while the high tech-laden Nasdaq composite index rose 13.65 to close at 1,923.22.
Another report from the Commerce Department said new housing starts fell for a second month in a row during March, dropping 1.3 percent to a seasonally-adjusted annual rate of 1.613 million units after a 2.2 percent fall in February.
But that was still only 1 percent below levels a year earlier when the economy was roaring ahead and starts were at a 1.63-million-a-year rate.
Cheaper interest rates since the start of 2001 have kept a floor under the housing sector by lowering mortgage payments and reducing interest costs on goods like furniture and appliances needed to furnish homes.
Naroff said the generally sturdy rate of new-home building and sales should help head off widespread weakening in consumer spending and add to an eventual pickup in it once the overall economy regains steam.
``The solid housing market adds to the belief that the rebound will be coming and it could be quite strong,'' he said, referring to consumer spending that fuels two-thirds of national economic activity.
RATE CUTS SOUGHT
The National Association of Manufacturers said it saw indications of a modest strengthening in economic activity but still urged further interest-rate cuts to encourage investment and spending.
``Signs of recovery are beginning to emerge, but the question is whether it will be weak or robust,'' NAM president Jerry Jasinowski said.
He added that with overstocked inventories still being sold off, first-quarter gross domestic product likely will advance only at a lackluster 0.9 percent annual rate, rising to 1.3 percent in the second quarter. But by the third and fourth quarters, Jasinowski predicted GDP will be running at annual rates of 3.2 percent and 3.9 percent, respectively.
If so, the economy could be relying upon so-called Old Economy businesses while high-tech New Economy companies keep struggling with their past production excesses.
Cisco Systems Inc. (NasdaqNM:CSCO - news), the maker of gear that helps to power the Internet, has warned it will cut 8,500 jobs as its earnings keep sagging in the face of weaker business and consumer spending.
Analysts said that while first-half economic activity almost certainly will be sluggish, prospects for the second half remained unclear.
Economist David Orr of First Union Corp. in Charlotte, N.C., noted the industrial production report said output of communications equipment rose 1 percent in March, which he said appeared to ``fly in the face of what...companies are telling us about weakness in their markets.''
Orr said the pickup in industrial production likely was ''the final nail in the coffin'' of an intermeeting Fed rate move but said he continued to expect one on May 15.>> |
