March 2005

Concerns over "Inflationary Pressures"

To no one’s surprise, the Fed’s Open Market Committee raised short-term interest rates on March 22nd by another 25 basis points (1/4 percent) bringing the targeted Fed funds rates to 2 ¾%. Although expected by almost everyone in the financial industry, the markets moved noticeably lower on the news with the DJIA closing nearly a full percent lower and the S&P 500 index dropping more than a percent on the day. In the report the Fed expressed some concerns regarding inflationary pressures in the economy, saying “pressures on inflation have picked up in recent months and pricing power is more evident.” This statement differs from previous FOMC statements in which the Fed had stated that inflation was well contained.

Adding to the concerns over inflationary pressures, the Labor Department reported that its Consumer Price Index (CPI) advanced 0.4% in February, or at an annual rate closing in on 5.0%. The core rate (excluding food and energy) rose 0.3% in February. What this means is that although higher energy costs contributed to a rise in the CPI it only accounted for 0.1% of the increase. Underlying inflation in the economy will become a real worry for the markets in the months ahead. Following the CPI news, the markets appear to be in a wait-and-see mood.