Investors seen mistaking inflation rise in Fed stance

Below Target

The central bank’s preferred gauge for price increases, the personal-consumption expenditure index, rose 1.3% in February from a year earlier and has averaged 1.8% since the 18-month recession ended in June 2009, according to data from the Commerce Department. That’s below the Fed’s 2% target.

Investors probably began to anticipate late last year that interest rates would rise, swayed in part by an apparent divide among Federal Open Market Committee members about when to end the central bank’s $85 billion monthly bond-purchasing program, Morgan said.

“A few members expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013,” while a few others specified no time frame, according to the minutes of the committee’s December meeting released on Jan. 3. “Several others thought that it would probably be appropriate to slow or stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet.”

Defending Stimulus

Less than eight weeks later, Fed Chairman Ben S. Bernanke defended the central bank’s unprecedented asset purchases, saying they are supporting the expansion.

“We do not see the potential costs of the increased risk- taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery,” he said Feb. 26 in testimony to the Senate Banking Committee in Washington.

“Given that he’s the chairman, we should probably abide by what Bernanke says, so that dovish stance on inflation will likely hold,” said Ioan Smith, a strategist at Knight Capital Europe Ltd. in London. Recently released economic reports also have been “lackluster,” which supports a low federal funds rate, he said. The Fed cut the target for its benchmark rate to near zero in December 2008.

Falling Sales

U.S. retail sales unexpectedly fell 0.4% last month, the most in nine months, following a 1% gain in February, based on figures from the Commerce Department. The median forecast of economists surveyed by Bloomberg called for sales to remain unchanged.

The Institute for Supply Management’s factory index fell to 51.3 in March from an almost two-year high of 54.2 the prior month, according to figures from the Tempe, Arizona-based group. U.S. employers added 88,000 workers in March, less than half the 190,000 forecast in a Bloomberg survey of economists and below the first quarter’s 168,000 average, data from the Labor Department show.

“For the Fed to take its foot off the pedal, nonfarm- payroll hiring needs to be above 200,000 for at least six to seven months and inflation needs to rise above its target,” Smith said.

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