Here's an interesting article on the subject, before the announcement:
Federal Reserve Meeting Starts; Policymakers May Be Ready to Raise Rates
By John Cranford and Vincent Del Giudice
(Adds latest markets in 7th paragraph.)
Washington, May 18 (Bloomberg) -- Federal Reserve policy-
makers meet today and analysts are betting central bankers may
announce they are prepared to raise U.S. interest rates to slow
economic growth as a way of keeping inflation in check.
The meeting of the Federal Open Market Committee started at
9 a.m. Washington time, a Fed spokeswoman said. An announcement
on Fed action, if any, is expected after 2 p.m. Washington time.
If the Fed signals a change in its ''bias'' -- or position
on future rate action -- the announcement might have the same
effect as an increase in the overnight bank rate, and push the
yield on the benchmark 30-year Treasury bond above 6 percent.
''There's a 50/50 shot now'' that the Fed will change its
stance, said former Fed Governor Lyle Gramley, now a consulting
economist at the Mortgage Bankers Association of America. ''If
the Fed were looking for a cover they have it now,'' with a jump
in prices, a rebound in manufacturing and an increase in the
money supply, he said.
Growth shows few signs of slowing. Moreover, last Friday
brought the first hint of accelerating inflation in more than two
years -- a 0.7 percent increase in the consumer price index for
April, which was the biggest monthly gain in nine years.
That news sent Treasury bond yields soaring and heightened
concerns that the FOMC will announce it's shifted from a so-
called neutral stance to a ''bias'' favoring higher rates. The
price of such a bias shift ''is already in the markets,'' said
William Sullivan, an economist at Morgan Stanley Dean Witter in
New York.
Bonds, Stocks Gain
Bonds gained in New York trading. The U.S. Treasury's
benchmark 30-year bond rose 3/8 point, pushing down its yield 3
basis points to 5.87 percent after the Commerce Department
reported starts of new housing construction fell 10.1 percent in
April -- the largest drop in more than five years. Still, the
bond's yield has risen from 5 percent in January, and follows the
market's biggest rout in three years on Friday, when yields rose
17 basis points.
Stocks were also higher, and the Dow Jones Industrial
Average rose 58 points, or 0.54 percent.
In an editorial today, London's Financial Times said the Fed
should raise its target today to slow economic growth and curb
inflation. The newspaper said the Fed's ''repeated forecasts of a
slowing economy -- just like everyone else's -- have so far been
wrong. It should raise interest rates.''
The Wall Street Journal's editorial page took the opposite
tack, suggesting no change in Fed policy. ''Our counsel to Mr.
Greenspan and company is, patience,'' the Journal wrote.
A New Tactic
The immediate announcement of a bias shift -- a new tactic
for Greenspan and his colleagues -- would be the latest in a
series of moves to make the Fed's actions more transparent and
prepare financial markets for interest-rate changes.
In 1994, the FOMC started announcing decisions to change the
overnight bank rate on the day it meets -- not six or eight weeks
later when the minutes of the meeting are released. In January,
the FOMC said it will announce bias changes immediately after
meetings when it's ''important for the public to be aware of an
important shift in the members' views.''
Previously, bias changes -- which can signal that the FOMC
is prepared to change the overnight bank rate between meetings,
as it did last October -- were announced only in the minutes.
Announcing that the next interest-rate move is probably
higher could also boost the Fed's credibility.
''Part of the Fed's responsibility for stability is quite
literally a psychological interaction with the markets,'' said
Neal Soss, chief economist at Credit Suisse First Boston Corp. in
New York. That may mean the FOMC will see the need for a bias
shift. ''Keeping in good graces with the markets has value,'' he
said.
Productivity Advances
None of the economists at the 30 banks and securities firms
that deal directly with the Fed's trading desk expect the FOMC to
raise the overnight bank lending rate from its current 4.75
percent, according to a Bloomberg News survey.
That's because Greenspan and other central bankers have made
a point of attributing the economy's strength to a surge in labor
productivity. Gross domestic product grew at a 4.5 percent annual
rate in the first three months of the year -- faster than the 3.9
percent growth rates of the past two years.
The Fed raised interest rates only once since February 1995,
in part because the consumer price index was falling to a 12-year
low. ''The performance of the American economy over the last
seven years has been truly phenomenal,'' Greenspan said in a May
6 speech.
At the same time, Greenspan cautioned that potential labor
shortages and the runaway U.S. stock market may lead to rising
inflation and threaten the economy, which is now in its ninth
year of growth. That led some investors to conclude he was
warning the Fed would act if the economy doesn't slow on its own.
After Friday's report that widespread price increases pushed
up consumer prices 0.7 percent in April, the biggest monthly gain
in almost nine years, the yield on the benchmark 30-year Treasury
bond surged 17 points to the highest in a year.
''We're at the moment where there ought to be some kind of
inflation,'' Jones said. ''If domestic demand remains strong and
global demand rebounds, that might begin to exert price
pressure,'' he said, which is why he expects the FOMC to boost
the overnight rate by a quarter point by November. |
