By Nell Henderson
Washington Post Staff Writer
Thursday, April 27, 2006
Federal Reserve Chairman Ben S. Bernanke is going to disappoint a lot of listeners when he addresses Congress today and provides no guidance on when the central bank will stop raising interest rates to keep inflation under control.
Financial market analysts and investors have longed for such a signal and thought they saw it last week when a summary of Fed officials' last policymaking meeting in March suggested they might be done after lifting their benchmark short-term rate once more in May.
But that expectation has wilted as several new government reports have shown the economy is growing briskly and inflation may be moving higher. Fed policymakers almost certainly will raise their benchmark rate again at their May 10 meeting but will be unable to indicate then whether they are done or see more increases in store.
"Anyone looking for clues about when the Fed will stop tightening is bound to be disappointed" by Bernanke's testimony today, said Ed McKelvey of Goldman Sachs U.S. Economics Research. "He simply does not know."
Rather, Fed officials will need to see how the economy and inflationary pressures behave after the May meeting before they decide whether to raise interest rates in June. Bernanke, testifying before Congress's Joint Economic Committee for the first time as Fed chairman, is likely to lay out the economic and inflationary risks he sees while keeping his interest rate options open, several analysts predicted yesterday.
Just yesterday, the Commerce Department reported that new orders for big-ticket durable goods -- items such as computers, cars and appliances -- rose 6.1 percent in March.
And sales of new homes surged 13.8 percent in March, after slumping in February, the National Association of Realtors said yesterday.
"The strong momentum undermines the notion that the Fed might be able to halt its rate hikes after just one more move," said Nigel Gault, an economist at Global Insight Inc.
The figures released yesterday prompted several analysts to estimate that the economy grew at faster than a 5 percent annual rate in the first three months of the year, a robust rebound from its weak finish at the end of last year.
"The economy is pumping on all cylinders," Richard W. Fisher, president of the Federal Reserve Bank of Dallas said in an interview yesterday. But, he added, economic growth in "the second half [of the year] probably will be a little slower."
Fed officials are raising interest rates to make sure strong economic growth doesn't cause inflation to take off. Higher rates make it harder for consumers and businesses to borrow, which restrains their spending, slowing growth and making it harder for businesses to raise prices.
The Fed has raised its benchmark federal funds rate -- the interest rate charged on overnight loans between banks -- 15 times since June 2004, to 4.75 percent last month. The rate has caused other short-term rates, such as those on home-equity loans, adjustable mortgages and credit cards, to rise as well.
But long-term interest rates, such as mortgages, are determined by global financial markets. Mortgage rates have risen in recent weeks but remain low by historical standards.
The housing market has already started to cool a bit, with price appreciation slowing, inventories of unsold homes growing and mortgage applications dropping, which implies that sales will droop as well. Many Fed officials expect this will help slow overall economic growth in coming months to an annual rate below 3.5 percent, which should keep the lid on inflation. But some policymakers don't see much of a slowdown yet, with consumer spending, business investment and exports all rising.
Housing is sending "mixed signals," Fisher said. But, "the rest of the economy is doing so well, it's mitigating the fall-off in one sector."
Meanwhile, inflation flared higher in March, in part because of higher energy prices. But other prices rose as well, for housing, clothing, medical care, recreation, air travel and education.
Fed officials cannot use interest rates to keep oil and gasoline prices from rising, since they are largely determined in global markets according to supply and demand pressures. But Fed policy can make it harder for businesses to pass their energy costs to consumers through higher prices.
Looking for signs of such pass-through inflation, economists look at core inflation measures, which exclude prices for energy and food. The Labor Department's core consumer price index rose 0.3 percent in March, the largest increase in a year.
"The March CPI was a mite disturbing . . . as pressures in the core index were not easily isolated to one or two troublesome items and were therefore consistent with the possibility of a pickup in this [energy price] pass through," McKelvey said.
"However, one month does not make a trend," he added, implying that core inflation could recede in following months. But several analysts say that is unlikely because of trends in rental housing prices, which are rising.
Rents fell dramatically while the Fed was cutting interest rates during and after the 2001 recession. Lower rates induced more renters to become homeowners, which fueled the housing boom and lowered demand for rentals. Now, with mortgages rising, rents are climbing, as well.
Much of the increase in the March core CPI reflected rising shelter costs for renters and homeowners, a senior Labor Department economist said. The "shelter" category, which also includes rising hotel rates, accounts for 42 percent of the core CPI.
Because of rising rents, "we suspect the markets could be negatively surprised as core CPI hangs higher longer than current expectations," wrote David Shulman, in a recent forecast published by the Anderson School of Management at the University of California at Los Angeles. And, he said, the higher-than-expected core CPI "will likely put upward pressure on U.S. interest rates."