Dormant Inflation Clears Way For Another Interest-Rate Cut

By John S. McClenahen If Federal Reserve Chairman Alan Greenspan is worrying that another cut in U.S. short-term interest rates would ignite rampant inflation, he need not be. With energy prices plunging 4%, inflation as measured by the U.S. Labor Department's Producer Price Index (PPI) fell a larger-than-expected 0.7% in December 2001, the latest month for which data are available. What's more, the so-called core PPI for finished goods, which excludes volatile food and energy price changes, declined 0.1% in December and was up only 0.7% for the full year 2001, its slowest rate of increase in four years, notes Gerald D. Cohen, a senior economist at Merrill Lynch & Co., New York. "Disinflationary pressures will remain strong at least through the first half of 2002," believes David Huether, chief economist at the National Association of Manufacturers (NAM), Washington. "Inflation is no hurdle for [a] Fed ease at present," emphasizes Maury Harris, chief economist at UBS Warburg, New York. Indeed, another 25 basis-point cut in the influential federal funds rate -- to 1.5% -- would serve a couple positive purposes, claims NAM's Huether. "First, it would lower further the cost of capital, which should aid in a recovery of business investment in 2002," he says. "Second, it would put badly needed downward pressure on the [U.S.] dollar," Huether contends. "The inflated value of the dollar [was] an Achilles' heel to manufacturers for much of 2001 and threatens to undermined recovery in 2002." The Fed's rate-setting Federal Open Market Committee next scheduled session is Jan. 29 and 30.

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