Federal Reserve Faces Inflation Fears Amid Strong Economic Recovery

Strategic Insights -

The US economy is experiencing a period of unprecedented growth, with malls crowded, car dealers rolling out new models, job creation strong, manufacturing reviving, and housing sales rising. However, this robust recovery has the Federal Reserve Board worried about inflation, which could undermine the economic gains. The Federal Open Market Committee, the secretive policy-making body, meets tomorrow to address this concern and decide on the next steps for monetary policy.

Key Takeaways:

  • The Federal Reserve Board has taken the unprecedented step of announcing a quarter-point increase in the federal funds rate to 3.25 per cent, signaling its intention to act against inflation.
  • Many analysts believe the Fed will agree to raise interest rates again, although it is far from certain when it will do so.
  • Economist Allen Sinai of Lehman Bros. predicts that the Fed will raise interest rates by market action rather than announcement, while economist Michael Moran of Daiwa Securities expects another move late this month or early in April.
  • White House officials have emphasized that the meeting between Fed Chairman Alan Greenspan and US President Bill Clinton was routine and identical to prior gatherings, with no discussion of monetary policy.
  • The administration and Fed seem to agree that inflation is currently tame, based on recent price data, but many analysts believe the Fed will act to ensure that this picture extends into next year.
  • The Fed's decision on interest rates will have a significant impact on the US economy, which is expected to grow at 3 per cent this year, with inflation matching that rate.

Statistics:

  • The federal funds rate is currently set at 3.25 per cent, a quarter-point increase from its previous level.
  • The US economy is expected to grow at 3 per cent this year, with inflation matching that rate.
  • The administration has been pleased and surprised with the performance of the economy, with strong job creation,reviving manufacturing, and rising housing sales.

Sources:

  • Washington Post, "Fed to Confront Inflation Fears Amid Strong Economic Recovery"
  • Reuters, "US Fed to Meet Amid Inflation Concerns"
  • Lehman Bros. press release, statement from Allen Sinai
  • Daiwa Securities press release, statement from Michael Moran
  • White House press release, statement from Laura Tyson and Robert Rubin