Tags: Moody | Zandi | Fed | Rates

Moody’s Zandi: Fed Will Have to Raise Rates Due to Inflation

Friday, 16 March 2012 01:06 PM

Can the Fed stick to its promise to keep interest rates at virtually zero through late 2014? A growing chorus of voices warns not to bet on that outcome, which has major implications for the bond market and for U.S. spending policy during an election year.

The Consumer Price Index was up 0.4 percent. Annualized, that’s inflation of 2.9 percent, well above the Fed’s target of 2 percent. Core inflation, which leaves aside volatile food and energy costs, was up 0.1 percent in February.

Even so, core inflation exceeds the annualized target, hitting 2.2 percent.

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"Inflation will be higher than they think," Mark Zandi, Moody’s Analytics chief economist, told CNBC, referring to the Fed’s rate-setting committee, the FOMC.

"They said they'll start to raise rates late 2014, but they'll be unable to stick to that commitment. They'll be under pressure to start tightening sooner."

Federal Reserve Bank of Richmond President Jeffrey Lacker agrees. He wrote on the bank’s web site that the Fed would like have to raise interest rates in 2013 to hold off inflation. “My current assessment is that an increase in interest rates is likely to be necessary some time in 2013,” Lacker wrote.

Federal Reserve Chairman Ben Bernanke is walking a tightrope, trying to balance inflation expectations and the Fed’s other mandate, which is to support “full” employment. That is defined by the Fed as an unemployment rate of between 5.2 percent and 6 percent, far below the current 8.3 percent jobless rate.

Bernanke disappointed commodities buyers in recent testimony by failing to mention a third round of quantitative easing, although he did reiterate plans to keep rates exceptionally low.

"The job market is far from normal," Bernanke said at the end of February.

"Continued improvement. . . is likely to require stronger growth in final demand and production."

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Friday, 16 March 2012 01:06 PM
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