- The Washington Times - Monday, June 28, 2004

Federal Reserve Chairman Alan Greenspan and his colleagues begin a two-day meeting today, at the conclusion of which they are widely expected to raise their overnight target interest rate from 1 percent to 1.25 percent. It would be the first installment in what the Fed has projected to be a “measured” pace by which “policy accommodation can be removed.” Given the rapidly changing circumstances on the inflation front, the Fed should strongly consider beginning its tightening phase with an increase of half a percentage point. Numerous price indexes confirm that inflationary pressures have intensified in recent months.

• Compared to an increase of 1.9 percent over a 12-month period ending in December, the consumer price index (CPI) has increased by 3.1 percent for the 12-month period ending in May. Over the same periods, the CPI’s core index, which excludes food and energy, increased from 1.1 percent to 1.7 percent.

• The CPI’s compounded annual rate of increase for the three months ending in May was 5.5 percent, and the compounded annual rate for the three-month period ending in December was 0 percent. Compared to a compounded annual rate of increase of 1 percent for the three months ending in December, the CPI’s core index increased at an annual rate of 3.3 percent for the three-month period ending in May.

• The core personal consumption expenditure price index increased by 0.8 percent over 12 months ending in December. That rate of increase has doubled to 1.6 percent for the 12 months ending in May.

• The annual rate of increase in the price index for gross domestic purchases averaged less than 1.2 percent during the last three quarters of 2003 before spurting to 3.5 percent in the first quarter of 2004.

The next two scheduled meetings of the Fed’s monetary-policy committee will take place between the Democratic and Republican national conventions and at the peak of the presidential campaign. Cognizant of that political calendar, we recommend an increase of one-half percentage point.

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