Wednesday April 16, 10:49 PM
Further US rate cuts seen in wake of inflation, housing news
By Justin Cole
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WASHINGTON (AFP) - Further Federal Reserve interest rate cuts appeared more likely Wednesday after government reports showed a modest rise in inflation and that the housing market remained mired in a deep slump.
Many economists expect the US central bank to continue its aggressive rate-cutting campaign at a looming two-day meeting on April 29-30, especially as a growing number of analysts believe the world's largest economy has fallen into a recession.
"For the Federal Reserve this inflation news brings some relief. If inflation expectations are kept under control by such evidence, then the Fed has a freer hand to cut rates," said Stephen Gallagher, an economist at Societe Generale (Paris: FR0000130809 - news) .
Gallagher raised the prospect of new rate cuts after a Labor Department survey showed consumer prices rose a modest 0.3 percent in March amid a spike in energy prices.
Looking at inflation pressures more broadly, the report revealed that consumer prices have risen 4.0 percent in the 12 months to March, partly as crude oil prices have skyrocketed.
Economists said weak labor market conditions in the United States are helping to contain wages and offset a jump in global commodity costs which have triggered inflation fears.
Some analysts say, however, that soaring energy and food costs could stoke inflation in coming months.
"Both remain big question marks in the near future with world supplies of both stretched tight," Global Insight economist Kenneth Beauchemin said of rising energy and food prices.
The monthly inflation snapshot showed that rising energy costs accounted for much of the rise in consumer prices last month.
Energy costs rose 1.9 percent in March, partly as natural gas and heating oil prices surged. Gasoline and electricity prices also moved higher.
Oil prices struck fresh record peaks Wednesday as a key oil futures contract, traded in New York, briefly hit an all-time high of 115.07 dollars a barrel.
Food costs increased a more modest 0.2 percent last month, as a drop in pork, dairy and fruit prices helped keep overall food costs tethered.
Joel Naroff, the president of Naroff Economic Advisors, agreed the inflation report gives the Fed elbow room to cut rates anew, but said inflation pressures are building, especially as a falling dollar makes imports more expensive.
The central bank -- led by chairman Ben Bernanke -- has slashed its key base rate by three percentage points to 2.25 percent since September and pumped hundreds of billions of dollars into the stressed financial system in a bid to fire up slowing economic growth.
A two-year long housing downturn, a related credit crunch, mounting job cuts and surging gasoline prices have slowed growth to a 0.6 percent annualized pace in the fourth quarter of last year.
Another government survey showed the housing market remains in the doldrums.
The Commerce Department said that new home construction and applications for permits to build new residential properties tumbled to a 16-year low in March.
Housing starts fell 11.9 percent to a 947,000-unit annual rate compared with the prior month, marking the lowest level of starts since March 1991.
Analysts said the central bank is facing a dilemma, however, as its slew of rate cuts so far have yet to inject fresh life back into the depressed housing market, although such cuts often take a while to filter through the economy.
"The problem is not the level of mortgage rates but the tightness in the credit markets that is limiting mortgage activity. Lowering rates does very little to convince lenders to lend," Naroff pointed out.
The housing market is expected to buck up later this year as a result of the rate cuts, but also due to a giant 168-billion-dollar economic stimulus package backed by President George W. Bush.
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