The Federal Reserve may signal today whether this year's 43 percent jump in oil prices poses enough of a threat to steer policy makers away from their plan for ``measured'' interest-rate increases. ``The problem with oil is that you always have this two-sided effect that it boosts inflation and it hammers growth,'' said Nigel Gault, research director at Global Insight Inc., an economics forecasting firm in Lexington, Massachusetts. ``The Fed has to decide which side it should focus on.''
The Fed's Open Market Committee will raise the overnight bank lending rate today by a quarter-point to 1.75 percent, according to economists at all 22 of Wall Street's biggest bond firms. Forecasters said they'll look for signs about whether the Fed will hold rates steady in either November or December, as 15 of the so-called primary dealers predicted last week. Chairman Alan Greenspan calls the higher oil prices a ``tax'' that may suppress growth without spreading to other goods and services. That argues for a possible pause, said economists including David Resler of Nomura Securities International Inc. in New York. A counterpoint raised last week by Fed Governor Edward Gramlich said it may be better to err on the side of raising rates, even if it costs jobs, because higher inflation always follows a sustained jump in oil prices. ``It is virtually inevitable that shocks will result in some combination of higher inflation and higher unemployment for some time,'' Gramlich, 65, said in a speech Thursday. ``The worst possible outcome is for monetary policy makers to let inflation come loose from its moorings.''
`Measured' Pace
Paul Samuelson, who won the Nobel Prize in economics in 1970, said the ``risk of inflation is not acute right now.'' ``The Fed wants to tell a consistent message of what its policy is, so they'll think very hard before straying from raising a quarter point,'' said Samuelson, 89, emeritus professor at the Massachusetts Institute of Technology. The Fed may be willing to let some of the oil-price rise pass through into inflation, said Kenneth Rogoff, former chief economist at the International Monetary Fund and now director of Harvard University's Center for International Development. ``They're not going to hawkishly raise interest rates to keep it all out,'' he said. ``But I think people are looking at the data and thinking that interest rates won't move as fast.'' The FOMC said in its May policy statement that interest rates could be raised from the lowest since 1958 ``at a pace that is likely to be measured,'' then kept the same language as it announced quarter-point increases in June and August. After today, the next meetings are Nov. 10 and Dec. 14.
Fed Forecasts
Nomura's Resler expects the Fed to pause once this year. ``To skew policy toward fighting the inflation consequences risks allowing recessionary forces becoming too rooted in the system,'' said Resler, whose firm is one of 22 that trade government debt directly with the Fed. Prices on federal funds futures contracts indicate a 98 percent chance the Fed will raise rates today, a 71 percent chance in November, and a 100 percent chance the rate will rise to 2 percent in December if the FOMC skips November, according to Miller Tabak & Co., a New York securities firm. Greenspan and other Fed officials said rising oil prices sapped some strength from the economy, leading to a ``soft patch'' in the second quarter. Forecasts for third-quarter gross domestic product fell to a 3.7 percent annualized pace from 3.9 percent last month, according to the median estimate of 61 forecasters surveyed by Bloomberg News. The oil market ``tops my current list of things to watch,'' Sandra Pianalto, president of the Federal Reserve Bank of Cleveland and a voting member of the FOMC this year, said in a Sept. 10 speech.
Oil Prices
Oil prices have ``clearly taken money out of people's pockets that they may have used for other aspects, which would have strengthened the economy more,'' said General Motors Corp. Chief Executive Officer Rick Wagoner in an interview last week. Crude oil futures prices in New York averaged $43.03 this quarter through Sept. 15, up from $38.24 in the second quarter and $30.98 in 2003. Even so, inflation remained tame. The core personal consumption expenditures price index rose 1.5 percent for the year ended in July, below the rate of 1.75 to 2 percent preferred by some Fed officials including Gramlich. ``Despite the rise in oil prices through mid-August, inflation and inflation expectations have eased in recent months,'' Greenspan told the House Budget Committee Sept. 8. The 78-year-old chairman is in his fifth term as Fed chairman. Bond investors also are betting on low inflation. The yield on the benchmark 10-year Treasury note yesterday closed at 4.06 percent, matching the lowest since April 2. The yield was at 4.07 percent at 10:55 a.m. London time, according to New York-based bond broker Cantor Fitzgerald LP.
Jobs and Inflation
The Fed's third rate increase this year would come less than two months before President George W. Bush and Democratic rival John Kerry, a four-term Massachusetts senator, square off in November's election. Bush says his economic policies helped add 1.44 million jobs this year and Kerry blames Bush for the net loss of 913,000 positions since January 2001. The economy added 144,000 jobs in August. The pace of job creation averaged 104,000 a month from June through August, falling from an average 225,000 in the first five months of the year. In Congressional testimony earlier this month, Greenspan suggested some companies are using their profit margins to absorb higher energy costs. Companies in the Standard & Poor's 500 Stock Index reported profits 30 percent higher on average in the second quarter from the same period last year.
``Higher energy costs have taken our margins away, there is just no doubt about it,'' said Douglass Henry, chief executive officer of closely held Henry Molded Products, a 40-year-old Lebanon, Pennsylvania-based company that turns waste into packing products. Henry is on a business council that advises Anthony Santomero, president of the Federal Reserve Bank of Philadelphia, on economic conditions. ``The fact that you have no margins brings to a screeching halt the reinvestment in growth and investment and capability,'' Henry said. ///www.bloomberg.com