Tighten in July?
By Jose Paulo Vicente
NEW YORK, May 19 (Reuters) - The Federal Reserve may start
tightening U.S. monetary policy as early as July to curb mounting
inflationary
pressures, former Fed officials and sources close to the Fed said.
''They'll have to bring rates up, and they'll have to do it very
carefully, very gradually because the (evidence) pointing toward
inflation in this country
is certainly bothersome,'' Preston Martin, a former Fed vice
chairman, told Reuters.
''They'll probably begin raising the rates in July,'' Martin said,
referring to the next meeting of the policy-setting Federal Open
Market Committee
(FOMC) on June 30/July 1.
Analysts said an extremely resilient U.S. economy suggests that the
best inflation news might be in the past.
They said incipient upward price pressure seen in the April
consumer and producer price reports, a 28-year low
unemployment rate, robust
consumer spending and rising wages all indicate higher inflation
down the road.
''They (policy makers) have several reasons to hike rates,''
William Ford, former president of the Federal Reserve Bank of
Atlanta, said in an
interview.
Although the Fed's decision to keep interest rates steady at
Tuesday's FOMC meeting came as no big surprise, sources close
to the central bank
said the gathering was probably marked by strident debate.
They said Fed Chairman Alan Greenspan, widely seen as a
moderate within the FOMC and the driving force behind Tuesday's
decision to leave
rates unchanged, probably had to deal with fiery opposition from
the FOMC hawks.
In order to convince his nervous colleagues to hold off on interest
rate hikes this time around, Greenspan probably had to do a lot of
horse trading,
the sources said.
Besides the likely maintenance of a monetary policy directive
leaning toward tighter credit, sources close to the Fed said they
expected Greenspan
to become more vocal about the possibility of tightening in the
months to come.
''Greenspan has been facing strong opposition from the hawks at
the FOMC. Five of them in particular have been very concerned
about
inflationary pressures,'' a source close to the Fed, who asked not to
be named, told Reuters.
''I think that the next thing we should brace for is a possible public
speech by Greenspan in which he would try to prepare the markets
for a
possible rate hike in July or maybe some time later in the year,'' the
source added.
Former Fed officials and sources close to the central bank said
they believed the decision to keep rates unchanged at the May 19
FOMC was not
unanimous.
''I think the minutes for today's meeting will show a split vote,''
said Ford, who now holds the finance chair at the Middle
Tennessee State
University.
Another source agreed: ''I'd be very surprised if there is only one
dissenter. They have passed on this one, but I think there will be
more than one
dissenter.'' The minutes for Tuesday's gathering are scheduled to
be released on July 2.
Analysts said the ongoing financial crisis in East Asia is now the
only force that could postpone what most observers see as an
inevitable tightening
later in the year.
But the experts agreed that the argument that the slowing effects of
Asia's crisis would continue to offset a strong domestic economy
was losing
momentum among the FOMC members.
''Asia is still there. But it looks that concerns about inflation back
home are overshadowing the jitters from Asia,'' the source close to
the Fed said.
However, some former Fed officials said they believed it would
be some time until the central bank decided to change monetary
policy.
''It's going to be very difficult for them (Fed policy makers) to
make a rational case to raise rates right now,'' John LaWare, a
former governor at
the Fed board, told Reuters.
LaWare said manufacturers' and retailers' ability to raise prices
continued to be limited by increased foreign competition and the
strength of the U.S.
dollar.
Robert Heller, another former Fed governor, agreed, saying that
''raising rates on Tuesday would have been a mistake.''
The Fed last changed monetary policy on March 25, 1997, when it
raised the federal funds rate by 25 basis points to the current 5.50
percent.
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