US SALES, CPI RAISE ANALYST EXPECTATIONS FOR '00 FED RATE HIKES
By Steven K. Beckner
Market News International - Hopes that the Federal Reserve might be finished in firming monetary policy faded further Tuesday, even among more dovish Fed watchers, with the release of strong retail sales and less-than-reassuring consumer price data.
The expectation continues to be that the Fed will sit out next Tuesday's Federal Open Market Committee meeting and leave the federal funds rate at 5.5%, but analysts moved up their projections for rate hikes in the year 2000, even as they increased their forecasts for GDP growth.
The larger-than-expected increase in November retail sales, coupled with upwardly revised October sales, received most of the attention on Wall Street, but analysts also cited disquieting elements in the CPI report in anticipating the Fed will raise rates at least 50 basis points and possibly more next year.
The Commerce Department reported that retail sales rose 0.9% last month, nearly twice as much as anticipated, while sales excluding autos rose 0.4%, as expected. Compounding the report's impact, October sales were revised substantially higher, to show an overall gain of 0.3% instead of being flat as first estimated. The ex-auto October sales gain was revised from 0.5% to 0.8%. There was also a small upward revision to overall September sales.
Meanwhile, the Labor Department announced that the CPI rose 0.1% overall and 0.2% excluding food and energy. Though in line with the median forecast, the report contained an acceleration in medical care to 0.4% from 0.2% in October and in housing to 0.3% from 0.1% in October. Airfares were up 0.7% and prescription drug prices were up 0.6% in November. New vehicle prices were also up 0.6% on a not seasonally adjusted basis. Holding down the overall gain, gasoline prices stayed flat after months of large increases.
Stephen Slifer, chief financial economist at Lehman Brothers, said he has been "as dovish as anybody on the Street" and a believer in "the new economy," but "that doesn't mean the economy doesn't have limits. They may be higher, but we still have limits." He said the strength of domestic demand revealed by the retail sales surge and signs of an upward creep in consumer prices have convinced him the Fed has not done enough with its three 25 basis point rate hikes this year.
If he were a Fed policymaker, Slifer said, he would be arguing for a 50-basis point rate hike at the Feb. 1-2 FOMC meeting.
David Jones, chief economist for Aubrey G. Lanston & Co., said the latest data have forced him to upgrade his GDP forecast and to conclude that the Fed will need to make at least two more 25-basis point moves, instead of the one he previously thought would be necessary. He said the Fed is now apt to push the funds rate to 6% by mid-2000.
Richard Berner, chief U.S. economist for Morgan Stanley, likewise said he is revising up his economic forecast and called for a total of 75 basis points of tightening next year.
The three economists agreed the FOMC will almost certainly leave rates unchanged Dec. 21 due to Y2K considerations. Although an unchanged policy has typically meant an asymmetrical policy directive with a tightening bias, they speculated this may be the meeting where the FOMC abandons its bias language in favor of some other means of disclosing its concerns about upside risks.
Slifer said the pair of November statistical series were "a little troublesome on both sides." He said the retail sales figures, including revisions, imply a 5.5% rate of fourth-quarter real GDP growth on top of a similar third-quarter growth pace. "There is nothing in there that would suggest any sort of emerging weakness," he said. "If anything, the pace of economic activity has strengthened again."
GDP growth is "exceeding anybody's estimate of potential growth," Slifer said, stressing his own belief in a higher non-inflationary growth potential.
Slifer said the CPI report also concerned him, noting that both the overall and the core rates are growing close to 3% annualized over the past three months -- "quite different than it was."
"It seems like the inflation numbers are not quite as friendly as they once were," Slifer continued, pointing to jumps in individual components that vary from month to month. "Each month there is a different culprit. ... It's beginning to smell a little bit like all this growth is putting a little bit of upward pressure on prices. Every month it's something else that gets you."
"It's a situation the Fed is going to have to watch very carefully," Slifer said. He said the firm's forecast is still for a 25-basis point February rate hike, but said if he were on the FOMC, "I'd opt for 50." He said the Fed may need to make a larger move for its "shock value ... to put the fear of God in the stock market."
Jones said recent retail sales "suggest that domestic demand is still extremely strong. ... What it says is that there's been no change in the incredibly strong momentum in the economy at the end of this year and going into next year despite the fact that Fed policymakers have been expecting" a slowdown.
Jones said the FOMC may well stick to a neutral stance next week, but then raise rates 25 basis points in each of the first two quarters of 2000. Even if the economy can now grow in excess of 3% due to productivity improvements and such, the economy is growing in the 4-5% range, he observed, and this will force the Fed to be "more aggressive." Otherwise, soaring stock prices could defeat Fed hopes for a soft landing, he warned.
Berner said he has elevated his forecast of fourth-quarter growth to 5.5%, and "the Fed obviously has to be a little uncomfortable with that. Even if you think the speed limit is 3% or 4%, we're well above that," even allowing for Y2K-related spending.
Berner said the FOMC may "drop (bias) language," but said he would expect the Fed to "one way or another signal that their job is not finished" and that "the risks are a little to the high side."
"We're now looking for three tightening moves over the course of the year" 2000, Berner said, adding that one could come "as early as February," followed by another in the second quarter and a third by the end of the year.
Though putting most of his emphasis on retail sales, Berner also observed that "the CPI is starting to edge up a little bit." Without a drop in apparel prices, the core CPI would have been up much more than 0.2%, he said. He said the Fed is also likely to be concerned by weakness in the dollar and related increases in import prices. |
