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Experts don't see cuts ahead for next week's meeting. Timing to be crucial for future moves
By Jeannine Aversa
Associated Press
Published on Wednesday, Jun 18, 2008
WASHINGTON: Wholesale prices barreled ahead while housing and industrial activity faltered — a blend of high costs and slow growth that appears to ensure the Federal Reserve will make no move on interest rates next week.
Fed Chairman Ben Bernanke and his colleagues have made it increasingly clear they're not inclined to cut interest rates further for fear of aggravating inflation.
On the other hand, if they act too quickly at the Tuesday-next Wednesday meeting to boost rates to fend off inflation, it would hurt an economy already battered by housing, credit and financial woes.
''The Fed is in a box,'' Ken Mayland, president of ClearView Economics in the Cleveland suburb of Pepper Pike, said after the latest batch of economic barometers were released Tuesday. That's why many economists are predicting the Fed will hold rates steady at 2 percent, a four-year low, at next week's session.
The Labor Department's Producer Price Index, which measures the costs of goods before they reach store shelves, leaped 1.4 percent in May, the biggest increase in six months. Energy and food prices, which are especially squeezing profits, figured prominently in the index's pickup.
The Federal Reserve reported that industrial production fell 0.2 percent in May, the second straight monthly decline. Plants operated at only a 79.4 percent capacity, the lowest since September 2005 after the Gulf Coast hurricanes. And there was more fallout from a depressed housing market.
The number of new housing projects started in May fell 3.3 percent to a 975,000 pace — the lowest in 17 years — as builders pulled back further. Builders are smarting as unsold homes as well as foreclosed homes pile up, adding to an already swollen supply. Sagging demand from would-be buyers and — more recently — rising mortgage rates, are adding to builder headaches.
''Builders are doing exactly the right thing — cutting back,'' said David Seiders, chief economist at the National Association of Home Builders. ''Now I'm a little more worried on the interest-rate front. I think we'll see mortgage rates recede to some degree. If not, it will be a tougher road for housing than anticipated.''
Yet another report Tuesday showed that the country's ''current account'' deficit, which
is the broadest measure of trade, widened to $176.4 billion in the first quarter, up from $167.2 billion in the final quarter of last year, as the U.S.'s foreign oil bill soared. The current account report covers not only goods and services, but also investment flows between the United States and other countries.
Some fear that the nation could be headed for a bout of ''stagflation,'' which is stagnant economic growth coupled with inflation.
But Bernanke — who has ramped up his tough anti-inflation talk over the past few weeks — has said that's not the case. Bernanke also has said he doesn't see a repeat of a 1970s-style situation where workers demanded — and received — big pay increases to cover rapidly rising prices.
Over the past year, overall producer prices have gone up 7.2 percent.
Energy prices were up 4.9 percent in May, the most since November. Diesel fuel prices jumped 11.2 percent, gasoline prices rose 9.3 percent and home heating oil increased 8 percent. Food prices went up a sharp 0.8 percent.
Last week, the government reported that consumer prices surged by 0.6 percent in May, the biggest increase in six months.
Wholesale prices are rising faster than consumer prices, because businesses have been limited in their ability to pass along to consumers all of their higher costs from energy and other raw materials. The Fed is hoping such restraint will continue. ''For now the Fed seems content to talk tough'' against inflation, said Stephen Stanley chief economist at RBS Greenwich Capital. ''This strategy is risky.''
WASHINGTON: Wholesale prices barreled ahead while housing and industrial activity faltered — a blend of high costs and slow growth that appears to ensure the Federal Reserve will make no move on interest rates next week.
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