The following appeared on page 5B of the Monday April 28, 2008 issue of the St. Paul Pioneer Press.
By Kevin G. Hall
NEW YORK - A few weeks ago, financial analysts were certain the Federal Reserve would try to spark the economy with another half-point cut in interest rates when its policy-making committee meets this week.
Since then, however, soaring oil prices and food riots across the globe have raised fears that people at home and abroad are becoming convinced the world is entering an era of rising inflation, and they're adjusting their expectations and behavior as a result.
In light of that, if the Fed's rate-setting Open Market Committee does cut its benchmark federal funds rate - the rates that banks charge one another for overnight lending - it's likely to be only a quarter-point, to 2 percent, not the aggressive cut most analysts were projecting weeks ago. But it's also likely to signal it intends to pause a while before cutting rates again because inflation remains stubbornly high - even though the U.S. 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 seeminly 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, whose 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 so far 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.
"This steeply rising price of food, it has developed into a real global crisis," United Nations Secretary-General Ban Ki-Moon said Friday, appealing for greater food aid.
Most Americans spend less than 10 percent of their incomes on food. But coupled with soaring prices for health care and oil, now above $118 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.
It also presents a dilemma for the Fed.
Three months of falling employment, flagging consumer confidence and a persistent housing crisis argue for more rate cuts to spark lending and reignite consumer spending. Traditionally, the Fed keeps cutting rates until unemployment has peaked.
"It would be unusual for the Fed to be on hold while that is happening," said Kretzmer.
The Fed normally has room to maneuver because a slowing economy douses the flames of inflation.
However, global oil and commodity prices keep rising, and they're being passed along to consumers and businesses. U.S. consumer prices were rising at a 4 percent annual rate in March, the latest reading. They're sure to have risen again in April, when oil leapt above $110 a barrel. Food prices rose 4.5 percent over the past 12 months; gasoline rose 26 percent.
Richard Fisher, president of the Federal Reserve Bank of Dallas, is worried people are beginning to expect rising inflation. That's why he's voted against further rate cuts at the last two Fed meetings.
In an interview last week with Fox Business News, he said that "really what we're dealing with are inflationary expectations. And what we're trying to make sure doesn't get out of control are the expectations of consumers and businesses, to begin imputing certain inflationary patterns, because then they'll be exacerbating inflation, and that's something certainly none of us wish to see."