Inflation hawks back in the limelight - Fed sources
04:00 p.m Apr 29, 1998 Eastern
By Jose Paulo Vicente
NEW YORK9 (Reuters) - The inflation vigilantes at the Federal Reserve
are back in the limelight after a long period behind the scenes and they
want to keep their spot on center stage.
Fed sources said the strong domestic economy in the first quarter of the
year provided evidence of what inflation hawks have been saying all
along: strong growth, healthy demand and a frothy stock market are
unlikely to slow by themselves, and might fuel inflation in the long
run.
''First-quarter data showed the economy has kept its underlying strength
despite Asia,'' a Fed source told Reuters, referring to the financial
crisis in Asia that had been expected to dampen economic growth in the
United States.
''That has put the hawks in alert mode,'' the source, who asked not to
be named, added.
Meanwhile, a source close to the Fed said the strength in the economy
early this year gave the anti-inflation hawks enough room to push for a
change in the central bank's stance. It is now leaning toward raising
rates from its previously position of holding rates steady. The change
came in March.
''That's what the hawks were waiting for. They needed some numbers to
make their voice heard. And, believe me, they are being heard now,'' the
source said.
Reports that the Fed had changed its bias was first reported in the Wall
Street Journal Monday. The Washington Post reported Tuesday that Fed
sources cofirmed the shift in the central bank's leaning.
The articles claimed the Fed changed its bias at the March 31 meeting of
Fed policy-makers. Normally, that information would have been released
to the public two days after the Fed's next policy meeting on May 19.
The disclosure roiled financial markets Monday and Tuesday, when the Dow
Jones industrial average fell more than 160 points. The index rebounded
and rose 71 points to 8,970 Wednesday.
While the change in its leaning does not mean the Fed will raise rates,
former Fed officials and university professors said a rate hike might be
looming.
They said the question at this point is not whether the economy will
slow down in the second quarter, as is widely expected, but whether that
slowdown will endure through the third and fourth quarters.
A growing number of economists, inside and outside the Fed, believe the
dampening effect of the Asian crisis on U.S. growth will be mostly
played out by mid-year, which suggests the economy could roar back after
a summer lull.
''That's the main concern now. The possibility of demand remaining
strong in the third and fourth quarters is what is having the Fed hawks
worried,'' the source close to the Fed said.
If the economy does not slow, there will be little left for the Fed to
do but raise rates in a bid to slow growth and ward off inflation.
''The question at issue is what is going to happen after the second
quarter slowdown,'' said Lyle Gramley, a former governor at the Federal
Reserve Board.
''The negative impact of the Asian slowdown will largely be over by
mid-year, and then the issue is whether the economy's underlying
strength re-emerges. My guess is that it will, and the Fed will have to
tighten policy,'' he said.
Robert Forrestal, a former president of the Federal Reserve Bank of
Atlanta, agreed, saying: ''I think they're fairly close to making a move
because the economy is moving rather rapidly.''
The former Fed officials said the Asia-induced slowdown in the second
quarter would probably prevent the Fed from raising rates at a May 19
policy-making meeting. But they added that they expected higher rates at
the next meeting in late June.
Robert Murphy, an economics professor at Boston College and a former
senior economist with the Clinton administration, said he also expected
the Fed to raise short-term rates later this year.
''The Fed would have acted already if it weren't for the Asian crisis
... The standard economic framework still holds, and the factors keeping
inflation down are mostly temporary,'' he said.
The Fed raised short-term rates in March 1997, the first increase in
more than two years, but has held rates steady since. Despite the strong
economy, inflation has been all but invisible, with the Consumer Price
Index up a mere 1.4 percent over the last year.
Copyright 1998 Reuters Limited. |
