Transcripts

Recession Worries Surface Among Fed. Policy Makers

SUSIE GHARIB: Confirmation today from the Federal Reserve that it expects the economy to contract this year. The central bank released minutes from its March meeting which showed some policy makers voiced concern about a quote, prolonged and severe economic downturn. That thinking led to a sharp cut in interest rates. But two regional Fed bank presidents, Richard Fisher of Dallas and Charles Plosser of Philadelphia, argued for a more moderate cut on concerns of rising inflation. Suzanne Pratt takes a closer look at those inflation concerns.

SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: A look at the minutes of the Federal Reserve's March 18 meeting shows a split among policy makers regarding inflation. While no one seemed comfortable with recent rising prices, Fed Chairman Ben Bernanke and the majority say inflationary pressures are likely to moderate later this year. They voted for an aggressive cut to interest rates at the meeting because of the deteriorating economic outlook. Fed Presidents Richard Fisher and Charles Plosser voted against the cut, regarding inflation as a more serious threat. Lehman Brothers economist Drew Matus explains that the dissenting Fed members are worried the public's inflation anxiety will result in actual inflation.

DREW MATUS, SR. ECONOMIST, LEHMAN BROTHERS: If a consumer thinks that prices are going to go up in the near future, they're likely to agitate for higher wages. Those higher wages then increase costs for companies; companies then pass on those higher costs to consumers through higher prices for their product.

PRATT: The Fed's minority opinion is likely to receive broad support on Main Street, where prices for everyday goods and services are climbing sharply. The government's latest report on retail prices illustrates why consumers are feeling squeezed. Milk and dairy products were up 13 percent from a year ago, cereals and baked goods up more than 6 percent, while gasoline was up nearly 33 percent. But economist Bob Diclemente says what Americans are overlooking is that the prices of products they don't buy every day, such as cars and computers, have been falling.

ROBERT DICLEMENTE, CHIEF U.S. ECONOMIST, CITI: It's very harder sometimes to register the effect of, let's say, the computer that doubled in power, but it costs as much as the last one you bought. I mean, people don't translate that in price terms.

PRATT: Economists also say that most consumers don't realize that inflation is a lagging economic indicator.

MATUS: Even as the economy is slowing, inflation can creep higher. It's only after the economy has slowed for a period of time that you begin to see downward pressure on prices.

PRATT: Because of that lag, Lehman's Matus predicts inflation will remain elevated through the third quarter of this year and he expects prices will only begin to fall in the fourth quarter. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.