Fed likely to raise rates again
By William Sluis
Chicago Tribune
After engineering a half-dozen hikes in short-term interest rates since late June, the Federal Reserve remains willing to go further to head off any possibility of inflation.
The Fed meets again tomorrow, amid a near-unanimous expectation that policy-makers will boost rates for a seventh time, to 2.75 percent.
As the meeting begins, central bankers will confront a report on the February producer price index, which measures cost pressures at the wholesale level.
Over the past year, producer prices are up 4.3 percent, according to the Labor Department. Concern is growing about a rise in the cost of imports, and not just petroleum.
Economist Lynn Reaser expects the report to show a gain of 0.4 percent for the month. She is looking for an identical 0.4 percent rise in the consumer price index, due out Wednesday. On the whole, however, she finds the inflation story less than compelling.
"Aside from energy, prices remain well in check. Labor productivity is growing rapidly, wage growth is modest, and companies are having a difficult time passing through higher costs. They don't have a lot of pricing power," says Reaser, of Banc of America Capital Management in St. Louis.
Automakers, hit by heavy competition, have been forced to offer numerous promotions, she says, while food prices are largely at a standstill.
"When food and energy are excluded, consumer prices have risen by only 0.2 percent for each of the last five months, and that hardly suggests severe concern about inflation," Reaser adds.
The incessant drumbeat of rising energy prices has the potential to slow the economy, as Fed members well understand.
The key question for their policy meeting is how quickly higher interest rates will start to take a bite out of consumers.
Chicago banker Kenneth Skopec says that not only will the Fed hike its short-term rate Tuesday but also that further monetary moves lie ahead.
"The central bank is committed to a series of interest rate increases, which will force a series of adjustments for consumers and the economy," says Skopec of MB Financial Bank.
The most worrisome adjustment likely will affect real estate, he says, amid widespread concerns that prices have reached bubble proportions in some parts of the country.
"Low interest rates have caused people to do crazy things with property, particularly in California," Skopec says. "Radio ads fill the air with promises of interest-only loans for buying homes, even though house prices are off the charts."
February home resales and new single-family home sales are due out Wednesday and Thursday, respectively. Also Thursday, the Commerce Department totals up the month's orders for durable goods.
The stock market was motoring along smoothly until both General Motors Corp. and Ford Motor Co. told Wall Street that business was in a skid and profits were so-so as oil remained above $55 a barrel.
Flossmoor, Ill.-based investment adviser Richard Evans says the country no longer lives by the motto of Charles "Engine Charlie" Wilson, the GM executive who in 1953 proclaimed, "What's good for General Motors is good for the country."
Even so, Evans adds, "it is a disturbing sign for investors to see Exxon (above $61 a share) and other oil companies trading at or near new highs, while GM is trading below $30 a share." Late last week, GM's stock hit a 12-year low of about $28.
Meanwhile, markets will trade a shortened week, closing on Good Friday.
