Marketplace Report: Investors Fret on Fed Rumors
Investors appear once again to be concerned that the Federal Reserve Board will decide to raise interest rates to stave off inflation. Bob Moon of Marketplace talks about what the Fed is likely to do, and how any move one way or another by the financial board affects the investment community.
ALEX CHADWICK, host:
Back now with DAY TO DAY. I'm Alex Chadwick.
The experts at the Federal Reserve meet to consider interest rates today. The Fed is widely expected to leave things the way they are, which means holding the benchmark-lending rate at 5 and one quarter percent. Still, Wall Street is focused not so much on today as the long term.
MARKETPLACE senior business correspondent Bob Moon joins us.
Bob, what do the experts on Wall Street think? What are they expecting, up or down long term?
BOB MOON: Well, that's a good question, Alex, and no easy answer to it. In fact, that's exactly the question that I put to the chief economist for Commerce Bank last night, Joel Naroff. He told me the answer is yes. Rates will be going up, or they'll be going down. He actually thinks the Fed will be lowering rates again soon, but he can't pull up the possibility that inflation will rear its ugly head and cause the money policymakers to think about raising rates.
And Naroff told me the problem is economists are in unchartered territory when it comes to what the Fed's doing now.
Mr. JOEL NAROFF (Chief Economist, Commerce Bank): They're trying to slow inflation by allowing the economy to grow at a moderately decent pace. And normally, the Fed raises rates enough to slow the economy sharply, and that's what slows down inflation. So there's a bit of an experiment going on here, and it's not clear that the Fed's going to succeed at that.
MOON: This is something the experts characterize as trying to bring the economy in for a soft landing. And right now, the Fed is aimed for the place that wants to touch down, but the drag shoot's still out, if you will. And all those step-by-step interest rate increases that they tried earlier are still slowing things down just gradually at the moment.
CHADWICK: Well, didn't the last consumer inflation report, wasn't that down a little bit? So wouldn't that indicate higher prices shouldn't be such a concern for the Fed?
MOON: Yeah, that's true, but the Fed pays more attention to something that they called the core inflation rate. Energy and food prices are so volatile that they factor those out. And when you do that and you don't consider the big drop in gasoline prices, for example, other prices are still on the rise. And if that core inflation rate keeps going up, some economists think the Fed might just decide that it needs to raise interest rates again to rein in those prices.
CHADWICK: Well, and just explains that the economists are still saying no, it's going to go down next year. Lower rates.
MOON: Yeah. They figured that the Fed's actions have kind of a bungee chord effect. And they think that inflation will eventually snap back under control soon. So the consensus seems to be that the Fed's more likely to lower rates soon so it doesn't get in the way of economic growth. And many of them believe that that could come as soon as spring of next year.
And today in the MARKETPLACE newsroom, we're putting together the next report in our series, Frozen Assets, taking a look at one Canadian town that thinks it may profit from global warming.
CHADWICK: Thank you, Bob.
Bob Moon of Public Radio's daily business show, MARKETPLACE, produced by American Public Media.
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