Analyst John Berry of the Federal Reserve

Federal Reserve to increase rates

John M. Berry - Analyst "Bloomberg News" gives its opinion.

Officials of the Federal Reserve seems determined to raise the 1%-ing the federal funds rate by a quarter percent at its meeting on 29-30 June.

The decision will be due mainly to the rapid change of the labor market. A faster rise in prices, as reflected in recent reports on inflation reinforced the growing conviction among Fed officials that it was time to begin the reduction of extraordinary monetary incentives provided by the economy.

Federal Reserve Chairman Alan Greenspan and his colleagues at the Federal Open Markets Committee (FOMC) said the world for many months that rates will rise as soon as it becomes clear that the economy has begun to steadily rise.

With low inflation, the Fed felt that the greater risk was that the economy may be losing its momentum back, rather than the risk of rising inflation. Now, when the risk of economic weakness, as noted, has declined, the Fed could more closely focus on inflation.

Six weeks ago, prior to the issuance of the March report on employment, job growth was so poor that many officials were still concerned that economic growth may stop later this year. C is still very low inflation, they felt that any increase of rates may wait until receiving solid signs of growth in the labor market, which will reduce those fears.

Opening doors
Prior to the April report of the Ministry of Labor on the March increase in the payment of payroll to 308000, the increase in jobs over the past six months amounted to an average of 60,000 per month.

Even the preliminary data for March were received with great optimism. This one month is not yet a trend, and has reason to believe that the March increase was caused by weather factors.

Nevertheless, the Federal Open Markets Committee (FOMC), opened the door for an increase in interest rates by changing the wording in the statement, which came after a meeting on 4 May.

"At the moment, with low inflation and low use of resources, the Committee is confident that the policy rate may be changed at a pace that is likely to be measurable," the statement FOMC.

The message on the payroll for April last Friday actually completed any dispute as to when the Fed starts to tighten its policy. This dispelled most doubts about what happened in the labor market and expanding economy.

"Healthy growth in employment"
Not only that payments for the last month rose to 288.000, the increase for March was revised upwards to 337.000, and the figures for February were also revised.

"The report on employment, released on Friday provided a welcome sign that a significant and previously elusive, aspect of economic recovery - a healthy increase in employment - are now in place," said President of the Federal Reserve Bank of Philadelphia, Anthony M. Santomero in his speech on Tuesday.

Of course, if the latest figures pushed the Fed to raise interest rates, the signs of the resumption of the weakness of the labor market may force the FOMC to abstain.

Surprise on consumer prices
As is evident from the wording of the statement FOMC, his intention now is to move by 25 basis points, but not necessarily to raise rates at every subsequent meeting. The word "probably" in the key sentence from the statement is a reminder that the growing labor market and inflation data to determine how "measurable" increase in rates will be.

Some analysts argue that the Fed should move faster than this phrase implies, because they think that inflation has become worse and that the Fed will take more aggressive action on rates to keep the situation under control.

Like all Fed officials were surprised at the 0.4% increase in core consumer price index for March. Its kernel is proved by 1.6% higher than a year earlier. If the nucleus increased by 0.2% last month, as many economists expected, according to the review of "Bloomberg", the change for the year compared with last year, will rise to 1.7%.

No real concerns
Many analysts noted that the core of the consumer price index rose by 2.9% year on year from January to March, which is much higher than desired for the officials of Federal Reserve rate.

FOMC, in its statement after the meeting last week, took into account the acceleration of price increases, did not express any real concern. "Although the available data on inflation is somewhat higher, long-term inflation expectations seem to be well balanced," said in a statement.

Company "Dana Saporta of Stone & McCarthy", examines the financial markets did not agree with this assessment of risk in his comments on Thursday to increase by 0.7% last month, producer prices for finished goods.

"We argue that the risks are weighted more towards inflationary pressures in this paragraph, but not so dramatically," said Saporta.

From suspended to aggressive
Fed officials do not deny that the acceleration of inflation obtained from the previous year's exceptionally low levels. On the other hand, no one thinks that the latest figures are a fair indicator of the acceleration.

As Santomero said in his statement, "I expect that the modest pace of recovery will be continuing to keep inflation at an acceptable level. Consumer price inflation should remain near 2% year on year and slightly lower for the core consumer price index and the deflator of personal consumption expenditures" .

On the other hand, Santomero and other officials are not going to accept anything as a matter of course. "Suspended" may increase the rates if necessary to become a "harsh".

"We must take action against over-confidence, because the dynamics of the inflationary process is not sufficiently well understood," said President of the Federal Reserve Bank of Philadelphia. "We must closely monitor incoming data on prices and assess the extent of inflationary pressures in the economy."

Bloomberg.com