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Fed Sends Signal: No Rate Increase as Growth Quickens (Update2)
Nov. 21 (Bloomberg) -- Federal Reserve officials sent a message to financial markets this week: There is no need to raise interest rates yet to curb inflation amid mounting signs of economic strength.
In eight speeches so far this week, the signal from policy makers is that the Fed will allow the economy to continue growing without raising interest rates because there is no danger of inflation. Three more Fed officials may back that message up in speeches today.
``It's very easy to conclude that the Fed is accommodative, and fairly significantly accommodative,'' Robert Parry, president of the Federal Reserve Bank of San Francisco, told Australian business economists in Sydney via satellite. ``We are comfortable with that position because of all of the slack we have in the labor and product markets.''
The comments by Parry, who votes on the Fed's target rate for overnight loans between banks known as federal funds, echoed those of other policy makers this week. As a result, U.S. Treasuries climbed for a second week in their first back-to-back gains since September. The central bank's key rate has been at a 45-year low of 1 percent since June 25.
Paring Bets
The rate on the June Eurodollar futures contract was at 1.58 percent in Singapore trading, after falling from as high as 1.81 percent on Nov. 10, suggesting some traders are paring bets the Fed will raise rates by then. Eurodollar futures are a gauge of three-month lending rates, which are typically 18 to 25 basis points more than the Fed's target rate.
Fed Chairman Alan Greenspan said he sees no threat of inflation and Michael Moskow, president of the Chicago Fed, said he's ``optimistic'' growth will be ``solid'' and that concerns inflation will accelerate are ``premature.'' Both Moskow and Greenspan vote on interest rates this year.
U.S. consumer prices held steady in October after rising for four months, the government reported on Tuesday. Inflation, excluding food and energy costs, is accelerating at a 1.3 percent annual rate so far this year. Vice Chairman Roger Ferguson and Jack Guynn, president of the Federal Reserve Bank of Atlanta, who are also voting members of the policy-setting Federal Open Market Committee, as well as William Poole, president of the Fed's St. Louis branch, are scheduled to give speeches. Fed Governor Mark Olson, who also votes on rates, will talk tomorrow.
`Soothing'
Guynn is scheduled to speak in Atlanta at 8 a.m. local time, followed by Poole's speech in Washington at noon and Ferguson at the Executives Club of Chicago's Special Committee lunch at 2 p.m. local time.
Policy makers' assurances that rates will remain on hold for a considerable period are ``soothing for the market,'' said Monique Wong, a bond analyst in London at UBS Warburg LLC., the securities unit of UBS AG, Europe's biggest bank by assets.
``They don't want the market to get ahead of itself,'' Wong said. The bank is one of 22 primary U.S. government securities dealers that trade with the Fed.
The 4 1/4 percent Treasury note due in November 2013 was little changed at 100 25/32 at 11:30 a.m. in London, yielding 4.15 percent. The yield is down 7 basis points, or 0.06 percentage point, this week.
`Appropriate'
The U.S. economy has room for ``pretty strong growth'' before the Fed raises interest rates from a 45-year low of 1 percent, Parry said. ``As long as inflation isn't a threat, the current stance of policy is appropriate.''
The world's largest economy grew at a 7.2 percent annual rate from July through September, the fastest pace in 19 years. Gross domestic product will probably expand 4.1 percent next year, according to the median forecast of 57 economists surveyed by Bloomberg News from Oct. 24 to Nov. 3.
``Overall, the most likely outcome for the U.S. economy appears to be robust growth in the current quarter and in 2004,'' Parry said.
Poole Wednesday called U.S. growth prospects ``excellent'' and said the labor market, which lost 3 million jobs between February 2001 and July 2003, has ``turned a corner.''
Other Fed officials who spoke this week were Philadelphia Fed President Anthony Santomero, head of the Dallas Fed Robert McTeer and Cleveland Fed President Sandra Pianalto.
There is no need to raise rates ``in the near future'' because the economy needs to expand at a rate of more than 4 percent for several quarters to reduce unemployment, Santomero said in a speech to the Philadelphia Estate Planning Council on Tuesday. |
