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Pastimes : The Justa & Lars Honors Bob Brinker Investment Club
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To: Justa Werkenstiff who wrote (5971)6/16/1999 9:22:00 PM
From: MrGreenJeans  Read Replies (1) of 15132
 
Financial Times, Lex, June 17th

US CONSUMER PRICES: Fed opportunity to raise rates

Just as one higher-than-expected inflation number last month did not rush the US Federal Reserve into raising rates, the central bank should not be dissuaded from tightening by yesterday's unchanged headline consumer price data.

There is a respectable case for the Fed to raise rates, regardless of the inflation figures. The three rate cuts which it made last autumn were largely inspired by the weakness of the financial markets and the world economy. Both have since demonstrably recovered. Meanwhile, the US economy has had two exceptionally strong quarters and looks, on the basis of the record trade deficit and low savings rate, to have some serious imbalances. In any case, the golden rule of central banking is that interest rate shifts do not tend to have a significant effect on the economy until 12-18 months later. Current inflation data might be useful but should not be decisive in policy setting.

Today's Congressional testimony by Alan Greenspan, the Fed chairman, should give investors a pretty good clue as to the bank's thinking. But it would be a surprise if the Fed did not take the opportunity of raising rates a quarter of a point at the end of the month; neither the markets nor the politicians would be too upset. The trickier decisions will come later in the year, especially if the economy stays strong and the inflation data remain subdued.

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