Inflation may seem docile, but don’t tell that to policymakers at the Federal Reserve. They view it as having wicked fangs.
When Fed members gather Wednesday and Thursday, they will be reminded that the so-called “core” rate of price pressure, excluding food and energy, has risen at an annual rate of 2.4 percent over the last year – and at an even higher rate over the last six months. That’s roughly 1 percent higher than what members of the Fed will tolerate.
Result: Widespread expectations for another quarter-point increase in short-term interest rates. That would take the Fed’s overnight lending barometer to 5.25 percent.
Chicago economist Carl Tannenbaum says “inflation expectations were rising until Chairman Ben Bernanke started talking tough. He’ll have to follow through with action.”
There are strong arguments, however, for the Fed not going too far in tightening credit, according to Tannenbaum, of LaSalle Bank. For one thing, the housing market has grown more iffy. And jobs growth is slowing.
Additionally, he said, “we have had some good news on prices over the last month. Commodities have fallen sharply. Natural gas, in particular, is less than half its level of last fall.”
Housing hopes
A 5 percent bounceback in May housing starts, reported last week, created fresh hopes that construction isn’t headed for a crash and that mass layoffs of carpenters and bricklayers won’t be needed.
But that doesn’t mean the problems in the real estate market will go away anytime soon, says economist Ian Shepherdson. He will carefully monitor Monday’s report on May new-home sales and Tuesday’s existing home sales for further signs of deterioration.
“The combination of still-high home prices and rising mortgage rates means that housing affordability numbers are horrible,” said Shepherdson, of High Frequency Economics, Valhalla, N.Y. Incomes have risen too slowly to keep up with zooming house prices.
Shepherdson expects construction levels over the next few months to sink to levels not seen since mid-2000.
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The mystery in the stock market remains the same: What became of the summer rally? As Wall Street contemplates first-quarter profit reports, which roll out in about two weeks, volatility has been high and prices have moved primarily lower, not higher.
Part of the problem is that foreigners have slowed their buying of American assets, says economist Michael Swanson of Wells Fargo & Co. in Minneapolis.
In 2000, direct investment here by overseas investors peaked at $336 billion, he said. By last year, that amount had plummeted to $87 billion.
Swanson’s bottom line: “It is unlikely that the stock market can see a repeat of such strong buying demand anytime soon.”
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(c) 2006, Chicago Tribune.
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AP-NY-06-23-06 1933EDT
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