Posted on: Monday, April 26, 2004
Interest rates bound to rise
By William Sluis
Chicago Tribune
CHICAGO — To the surprise of many, Federal Reserve Chairman Alan Greenspan has minced few words in recent days about interest rates, saying "they must rise at some point."
The question, of course, is when. With the chairman offering less doublespeak than usual, the wait may not be as long as many had hoped.
Guesses range from May 4, when the Fed next meets, to sometime next year. What is clear is that the central bank will move, sooner or later, to restrict credit and leave the lowest rates in 46 years.
What also is evident is that economic activity is on an upward trajectory, with fewer signs that it will stall out.
That brings us to Thursday's report of first-quarter gross domestic product. Chicago economist Robert Dederick is looking for it to show the economy steaming forward at a 4.8 percent annual rate, ahead of the fourth-quarter rate of 4.1 percent.
"Economic strength was broad and deep across many sectors as the year began, and the momentum is continuing," said Dederick, of RGD Economics. "The current rebound is an incumbent politician's dream during an election year."
He said the only area that showed notable weakness in the first quarter was exports.
As to whether the Fed will need to raise rates, Dederick said: "It is quite likely to happen before the year is over. But inflation is starting out from an eminently satisfactory level. There are few signs the economy will overheat anytime soon."
One factor arguing for continued low rates is the mood of consumers, which remains relatively glum. Perhaps it is the situation in Iraq, or fears that a weak job recovery may flicker and die. For whatever reason, some Americans refuse to accept any semblance of good news.
But don't be surprised if tomorrow's report on April consumer confidence shows a nice gain. Chicago economist William Hummer is looking for a number above 90, up from 88.3 in March.
"The big change is in people's perception of the job market. Any improvement that they see heightens their expectations about the future. That translates into more spending," said Hummer, of Wayne Hummer Investments.
His bottom line: "For once, expectations of a rosy scenario are being fulfilled."
The booming real-estate market will be in the spotlight today and tomorrow, with reports on March new single-family home sales and sales of existing homes, respectively. Analysts are calling for further gains from the annual rates of 1.16 million new homes and 6.12 million resales in February.
On Friday, the report on March personal income and spending is due out, as is the April survey from the Chicago Association of Purchasing Managers. Both are expected to indicate the recovery remains on track.
The stock market has been marking time since the start of the year, as worries about interest rates have stalled progress.
But Chicago investment manager Marshall Front thinks investors have pretty much accepted the concept that rates will rise.
"If the Fed were to raise the short-term target from 1 percent to 2 percent in several steps, it wouldn't do much harm to blue-chip companies with earnings. About the only ones who would be hurt are speculators," said Front, of Front Barnett Associates.
As the year wears on, he said, Wall Street will benefit from fewer uncertainties over Iraq and the fall elections. In the meantime, he added, "corporate profits will pretty much take care of themselves."
