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To: richardred who wrote (28)	4/20/2006 11:12:27 AM
From: Peter Dierks	Read Replies (1) \| Respond to of 340

4/19/06 The Fed hasn't sounded the all-clear By Paul J. Lim The Dow Jones industrial average jumped nearly 200 points yesterday on what was perceived to be better-than-expected news from the Federal Reserve Board. But investors may have overreacted just a tad. Send comments or suggestions to: biz-buzz@usnews.com Biz Buzz: A daily update on economic and business news Archive: A comprehensive listing of Biz Buzz columns Yesterday, the Fed released the minutes from its most recent board meeting, in March, the first to be led by the new Fed chairman, Ben Bernanke. What got investors excited was a sentence imbedded in those minutes: "Most members thought that the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much, given the lags in the effects of policy." Investors took that to mean that after the Fed raises short-term interest rates by another quarter of a percentage point in May, it will most likely stop lifting rates. Since rising rates hurt corporate earnings and slow the economy, stock investors rejoiced at the likelihood that the Fed was nearly done tightening the nation's monetary policy. But what investors failed to read were the two sentences that followed this line. The Fed went on to say that "members also recognized that in current circumstances, checking upside risks to inflation was important to sustaining good economic performance. The need for further policy firming would be determined by the implications of incoming information for future activity and inflation." Translation: Even though Fed members think that they may be near an end to their rate hikes, further tightening may be needed based on future inflation readings. Well, this morning the Labor Department reported that retail inflation is indeed growing faster than expected. The consumer price index rose 0.4 percent in March (after climbing just 0.1 percent in February), thanks in part to a 1.3 percent jump in energy costs. Even if you were to strip out volatile energy and food prices, the so-called core CPI rose 0.3 percent, which was slightly more than expected. And over the past 12 months, consumer inflation has risen by 3.4 percent, the Labor Department reported. This morning's bad news on inflation drove long-term bond yields back up above 5 percent. The yield on the 10-year treasury note, which had sunk to 4.97 percent Tuesday, was back at 5.03 percent early Wednesday. And if bond traders are driving long-term yields higher in reaction to inflation, don't be surprised if the Fed continues to raise short-term rates for a bit longer than investors expect. US News and World Reports