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To: Dealer who wrote (17203)	5/2/2000 8:05:00 AM
From: candide-	Read Replies (1) of 35685

Economy and inflation slowing Fed should resume neutral monetary policy stance By Joseph V. Battipaglia, CBS MarketWatch.com Last Update: 12:32 PM ET May 1, 2000 NewsWatch Latest headlines NEW YORK (CBS.MW) -- For the first quarter, the U.S. economy expanded at a 5.4 percent annualized pace vs. an increase of 7.3 percent in the fourth quarter of 1999. This performance was the weakest since the second quarter of last year and I expect to see additional moderation as the economy slows to a 4 percent growth rate. This pattern of strong growth followed by moderation has been common throughout the expansion and I believe this time should be no different. As the economy cools, so too should inflation. The gross domestic product price deflator rose 2.7 percent overall and 2.3 percent excluding food and energy prices during the first quarter. This is a slight increase over the fourth quarter where prices rose 1.9 percent. Since oil prices have already fallen from above $30 per barrel to $25 per barrel along with other commodity prices, I expect to see additional benign inflation data in the months ahead. This is important since it will ultimately provide the room necessary for the Federal Reserve to return to a neutral stance on monetary policy. Higher wages not inflationary In a separate report, the employment cost index rose 1.4 percent for a 4.3 percent annual rate. While many were quick to interpret this as inflationary, I again say that higher wages are not inflationary in and of themselves. This is because labor costs must be measured in terms of cost per unit of production. As the most recent productivity survey points out, unit labor costs increased .7 percent on strong unit volume growth because annual productivity growth climbed 3.6 percent. Most companies are also benefiting from low costs of raw and intermediate materials as evidenced by the slight 1.2 percent year-over-year increase witnessed by the producer price index. This demonstrates a high level of balance in the economy with few signs of constraint with regard to capacity or supply. Clearly, the stock market is consumed with the direction of monetary policy and level of inflation the Federal Reserve will tolerate. I believe the Fed's gradual approach to higher rates remains in force and that the next increase will be one-quarter of one point at the May FOMC meeting. I also expect the board to maintain a bias toward tightening. However, I also believe that the data in the ensuing months will allay worry about possible overheating and the return of inflation in any meaningful way. Therefore, it would not surprise me that the Federal Reserve gives way to a neutral bias by the fall. Should this scenario play out, our expectation for higher equity prices driven by strong earnings growth would remain likely

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