Inflation concerns may halt Fed cut

Interest rates may go unchanged next week

April 26, 2008|By Kevin G. Hall | Kevin G. Hall,McClatchy-Tribune

NEW YORK - A few weeks ago, financial analysts here were certain that the Federal Reserve would try to spark the economy with another half-point cut in interest rates when its policy-making committee meets next week.

Since then, however, soaring oil prices and food riots around the globe have raised fears that people at home and abroad are becoming convinced that the world is entering an era of rising inflation, and they're adjusting their expectations and behavior as a result.

In light of that, the Fed might not cut rates next week. If its rate-setting Federal Open Market Committee cuts its benchmark federal funds rate - the rate that banks charge one another for overnight lending - it's likely to be only a quarter-point, to 2 percent, not the aggressive cut that most analysts were projecting weeks ago.

Even if the Fed cuts the rate, it's likely to signal that it intends to pause a while before cutting rates again, because inflation remains stubbornly high - even though the economy appears to be stalled.

Inflation, the rise of prices across the economy, remains a threat at home and abroad. The biggest part rises from the seemingly unstoppable climb in oil prices. But the prices of everything from grains and dairy products to base metals and raw materials also are surging.

That drives up the price of nearly everything we eat, heat, cool, drive or manufacture.

That's bad news for the Fed. Its primary mission is to keep inflation low to preserve the buying power of U.S. consumers.

In recent weeks, there have been food riots in Egypt, Haiti and elsewhere as rising prices for globally traded commodities such as rice and corn have pushed up food prices.

Corn prices are up 30 percent, and rice is up more than 50 percent this year.

The prices of some U.S. staples, such as eggs, are up about 30 percent since March 2007.

People in developing nations often spend more than half their incomes on food, and that's why their anger about rising prices is spilling onto the streets.

Most Americans spend less than 10 percent of their incomes on food. But with soaring prices for health care and oil, now above $115 a barrel, and with gasoline over $4 a gallon in some places, the middle-class American consumer is taking it on the chin.

"It does represent a change," said Peter Kretzmer, an economist in New York for Bank of America.

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