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To: 2MAR$ who wrote (52)	5/24/2001 5:05:41 PM
From: 2MAR$	Read Replies (1) \| Respond to of 208838

FED WATCH: Inflation Words May Be A Prelude To An End By Michael S. Derby Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--The Federal Reserve may be getting the market ready for the beginning of the end. Comments and statements from the central bank and its officials have in recent months repeatedly stressed that its key concern is that U.S. growth levels have slowed too much, and that aggressive doses of interest rate cuts are necessary to get the economy back on track. But more recently, Fed officials have also begun slipping into their economic assessment statements an acknowledgment of the risks of inflation. In its statement accompanying last week's half percentage point cut in the fed funds interest rate target to 4%, the Fed made mention of price pressures for the first time in several months, adding the important caveat, however, that "inflation is expected to remain contained." Now, the ante has been raised again. On Thursday afternoon, markets were rattled by the explicit utterance of the "I" word by Federal Reserve Governor Larry Meyer. In prepared comments for a speech in Scotland, Meyer reiterated the need for the central bank to act forcefully to change weak economic circumstances, but he included the following sentence: "Given that labor markets remain tight, that inflation remains above the rate that I would find acceptable over the longer run, and that core inflation has been edging higher, attention must also be given to calibrating the easing to avoid overshooting in the other direction in a way that ends up adding to price pressures as growth strengthens." For many Fed watchers, the inflation chatter makes little difference to the passage of further rate cuts over the next few months that are generally expected to amount to an additional quarter or a half percentage point of monetary easing. Instead, they said, the comments may serve as a subtle warning to the market that the easing cycle is almost over, and that sometime next year the Fed will have to again increase rates to keep a recovering economy from driving up inflation. "There have been some subtle hints lately that some Fed officials... are starting to consider that the amount of tightening they've done is massive, and they may be looking for a place to pause," said Jade Zelnick, head economist with Greenwich Capital Markets in Greenwich, Conn. Markets already appear to be looking for that pause, and they're also betting the Fed will start raising rates next year as the economy begins to rebound. Market participants say that Eurodollar futures contracts are predicting that the Fed will tighten rates to somewhere around 4.75% and 5% by the fall of next year. "The Fed is in the process of pushing the funds rate down to unsustainably low levels," said Dana Johnson, an economist at Banc One Capital Markets in New York. Given current economic conditions, "that's not going to prevent them from easing now," but it will require rates to move higher sometime next year, he said. Central Banks, Core Missions Some also see Fed official's references to inflation as a bone thrown to those who fear that the central bank's effort to spur growth has come at the expense of its commitment to keep prices contained. Meyer and the Fed are "not trying to soften the market up for a slowdown in the easing process, but to start addressing the rebound in inflation expectations" that many people are currently entertaining, said Lou Crandall, chief economist at Wrightson & Associates, in New York. And in that light, the inflation comments don't have any real impact on monetary policy - they simply serve to show that the Fed knows what balls it's juggling, Crandall explained. Fed Chairman Alan Greenspan is scheduled to address an economists' group in New York Thursday evening. Market participants are uncertain what he'll talk about, but few are looking for him to go much beyond the general outlook laid out in the FOMC statement from last week. -Michael S. Derby, Dow Jones Newswires; 201-938-4192; michael.derby@dowjones.com (END) DOW JONES NEWS 05-24-01 05:04 PM * end of story *