Transcripts

Higher Interest Rates May Be On The Horizon

SUSIE GHARIB: There's a growing sense here on Wall Street that higher interest rates are just around the corner. Fueling that speculation -- comments from Federal Reserve Chairman Ben Bernanke and other Fed officials that inflation is now a primary concern. Fed policymakers meet in two weeks and many economists expect the central bank to formally acknowledge a change in policy, from stimulating growth to clamping down on rising prices. Scott Gurvey reports.

SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: For some time, bond traders have been buying and selling on the belief the next interest rate move by the Federal Reserve will be up. Now, the rest of Wall Street is catching up, in a struggle to analyze a series of statements by Fed Chairman Ben Bernanke and other Fed officials. The central bankers are raising inflation fears and talking tough in the lead-up to their next policy meeting, June 24 and 25. But the chairman, while noting an increase in inflation expectations, also said a slowdown in growth will bring down prices. Economist Cary Leahey of Decision Economics says strong talk from the Fed may not necessarily lead to action.

CARY LEAHEY, ECONOMIST, DECISION ECONOMICS: They're definitely hawkish, but obviously, talk is cheap and actual action is tough. And this is a political -- election year and just last Friday the unemployment rate went up A half a percent, so it sounds a little crazy that the Fed can talk hawkish if the labor market looks weak and it is weak. But this increase has been well anticipated by the Fed and other analysts. So, in some sense, Bernanke also said yesterday, well, this doesn't change our view.

GURVEY: The central bank is not expected to change interest rates at its June meeting. But Fed watchers do expect a significant change in the statement on economic conditions, indicating that the balance of economic risk has shifted from growth to inflation and preparing the markets for a rate hike later in the year. Larry Kanto, chief economist of Barclays Capital, sees rates rising from their current level of 2 percent to 3 or more, with most of the move coming next year.

LARRY KANTOR, CHIEF ECONOMIST, BARCLAYS CAPITAL: We've had more inflation hitting something like 5 percent or maybe higher, 2 percent does seem too low and I think it's going to be difficult for the Fed to hike rates aggressively, unless economic growth is pretty strong. That doesn't really look likely, in other words -- 2.5, 3 percent, maybe, but probably not much stronger than that.

GURVEY: Kanto says he does not expect to see a return to the stagflation conditions of the 1970s, as some have feared. In the '70s, he notes, both inflation and unemployment were at double digits, factors which are not in place today. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.