Even before last Friday's release of Producer Price Index (PPI) numbers for January, speculation had begun about whether the Federal Open Market Committee (FOMC) would increase the federal funds target rate by more than 25 basis points at its next scheduled meeting on March 22.
Part of the speculation was fueled by the fact that in testimony to Congress last week Federal Reserve Board Chairman Alan Greenspan did not continue to use "measured" to describe the Fed's response to U.S. economic growth. Speculation intensified on Feb. 18 when the U.S. Labor Department reported that in January the core-PPI, which strips out changes in fuel and food prices, rose eight-tenths of a percentage point, four times what economists generally were expecting.
However, the economists at Merrill Lynch & Co. do not expect the FOMC to raise the fed funds target rate by 50 basis points to 3% from its current 2.5% when next the committee meets. "In all, we believe that one month does not make a trend, and its not clear if the prices will stick or be passed on to the consumer," say the economists. The Feb. 18 report, which showed a three-tenths of a percent advance in the overall PPI in January in contrast to December 2004's three-tenth's decline, "alone will not be sufficient to prompt the Fed to start tightening [the money supply] more aggressively," Merrill states.