- The Washington Times - Wednesday, August 11, 2004

The Federal Reserve yesterday acknowledged the drag high energy prices have put on growth and jobs, but insisted the trend is temporary and went ahead with its campaign to gradually raise interest rates.

Even after lifting rates by a quarter percentage point for a second time this year, the Fed noted that interest costs remain historically low, are little above the 45-year lows set in the past year, and still are stimulating the economy.

Fed watchers said the central bank was signaling that it will be monitoring rising oil prices and their effect on growth. If this spring’s dip in growth to a 3 percent rate proves to be more than just temporary, it will postpone further rate increases in the fall.

The Fed’s reassuring message, and hopes that yesterday’s rate increase is the last before the November elections, lifted stocks. The Dow Jones Industrial Average jumped 130 points to 9,945.

Fed Chairman Alan Greenspan “still thinks this is a vibrant economy and oil prices are a temporary phenomenon. Hopefully, he’s right about that,” said Bill Zadrozny, president of Siemens Financial Services Inc.

In helping Fortune 500 companies develop plans for hiring and investment, Mr. Zadrozny said he has found that executives are upbeat about the economy and want to move forward. But they are hesitating because of the uncertainties raised by high energy prices, renewed terrorism threats and upcoming elections.

“There’s just too much in your face these last few months,” he said. “Right now, we have $45 oil, which is affecting the consumer. … We know there’s going to be terrorism. … We have a political campaign going on and the negative rhetoric is high. You have to be very cautious here.”

Mr. Zadrozny said the Fed is correct to assume that the softening of growth this spring and drop in job gains to 32,000 last month were only temporary. Most business executives feel the same way, he said, although they remain reluctant to do more than talk about mobilizing the considerable cash they have on hand by hiring and investing.

A report on productivity from the Labor Department yesterday showed that many businesses continue to make do with their existing work force and may not need to resort to more hiring.

Productivity, or output per worker, rose 2.9 percent in the second quarter — nearly the same as the economy’s 3 percent growth rate.

Some forecasters believe the central bank may be underestimating the impact of high energy prices and fears about terrorism, in particular by assuming that these are only temporary.

As premium crude prices breached $45 a barrel in New York trading for the first time yesterday, the Energy Information Administration announced that prices will remain “for the foreseeable future” above $30 — a level considered high last year.

Private forecasters are even less optimistic, predicting prices will stay in the $40 to $50 range and could spike higher. Prices for delivery of oil a year from now are close to $40 on the New York Mercantile Exchange.

“This is a long-term trend, not a spike. There is no oil bubble,” said Jay Schenker, economist at Wachovia Securities. High oil prices are being driven by steadily rising demand in the United States and Asia at a time when supplies have gotten increasingly tight and are under the constant threat of disruption.

“We know that Middle Eastern geopolitical uncertainties will not vanish overnight,” Mr. Schenker said, so prices will remain elevated, not fall back as they have in the past.

Peter Morici, a University of Maryland business professor, said the Fed is mistaken in assuming that recent economic softness is only temporary. It is ignoring many negative factors hitting consumers and businesses outside energy, he said, from the flagging stock market to the waning impact of tax cuts.

“Either the Fed revises it plans to continue raising interest rates through next year, or it risks pushing the economy into a recession,” he said.

“Moderate inflation will continue from rising oil prices and tightness in international commodity markets, and Fed tightening will do little to quell these pressures.”

But Lawrence Kudlow of Kudlow & Co. said the sharp rise in oil, gold and other commodity prices is a signal that the Fed’s policies have been too easy and it needs to raise rates.

“Greenspan should not risk accommodating or monetizing the higher oil price,” he said, noting that the energy price increase could spread throughout the economy and produce generalized inflation.

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