WASHINGTON -- Bond market hopes for another easing by the Federal Reserve faded yesterday amid renewed worries over inflation and talk by the Bush administration of measures to stimulate the economy.
Some financial analysts said they still expect Fed policymakers to lower the federal fund rate to 5% to prod a sluggish recovery, but any move seemed likely to be postponed at least until Nov. 1, when the Labor Department is scheduled to release the unemployment report for October.
Other anlysts said hopes for more stimulus from the Fed are less of a sure bet.
The mixed views on the outlook for rates came after yesterday's report from the labor Department showed an unexpectedly high increase of 0.4% in the consumer price index for last mont. The gain was double the 0.2% rise in the preceding three months.
Equally troubling, consumer prices excluding food and energy were up 0.4% for the third month in a row. The left the so-called core rate of inflation at a seasonally adjusted annual rate of 4.8% so far this year, not much of an improvement, given a year of recession.
Meanwhile, President Bush met with congressional Republican leaders yesterday to review measures aimed at giving the economy additional impetus, even though White House officials continued to insist the recovery is proceeding as expected.
The steps under discussion included a capital gains tax cut, incentives for home buyers, and an increase in the limit on tax-exempt earnings of senior citizens, the leaders said after the meeting. There also was discussion of new legislation to extend jobless benefits to the unemployed following the President's successful veto of a rival Democratic plan, which the administration labeled a "budget buster."
"The main problem for the bond market is the feat of fiscal stimulus on top of the monetary stimulus that is already in the pipeline," said Thomas Carpenter, chief economist for ASB Capital Management Inc. "Investment managers from this point forward better start shifting their asset allocations out of bonds and into stocks."
Mr. Carpenter added, "The bot- line is that the economy's doing just fine. It's not a great outlook for bonds."
The Commerce Department is scheduled to release a preliminary estimate for third-quarter U.S. output on Oct. 29, and analysts say the figures will confirm that the economy has climbed out of the recession. The fixed-income research department of Dean Witter Reynolds Inc. calculates that the report will show real gross national product rose at an annual rate of 2.5% to 3%.
"That many reduce the pressure on the Fed to carry out another easing of policy," said William Sullivan, director of money market research at Dean Witter. "Easing's not guaranteed. It is dependent on some evidence of a renewed flagging in the labor force going into the fourth quarter. Lacking that, we believe policy is on hold."
Samuel Kahan, chief economist for Fuji Securities Inc. in Chicago, said, "Investors are generally standing there with information that inflation hasn't really come down as yet, and they're worried that it might not come down in the future. Personally, I think that those concerns are over-rated and we're likely to see inflation com down, but the market's reaction is to say that's not a sure bet."
Other analysts said they continued to bet the Fed will ease policy at least one more time. "Inflation is not a threat to the Fed, it is definitely moderating," said Donald Fine, chief market analyst for Chase Securities Inc. "I think the Fed will go to 5% on fed funds, but they'll wait until they get some more numbers," he added.
Lyle Gramley, chief economist for the Mortgage Bankers Association, said he is perplexed Fed officials did not opt for lower rates after the last unemployment report. He also said the case remains strong for additional action to help a struggling economy.
"The anecdotal evidence we have is that the housing market died in August," Mr. Gramley said. "This is the most joyless recovery I've ever lived through."
Mr. Gramley and other analysts said much of the strength in the third-quarter GNP report due out Oct. 29 will reflect gains in personal consumption and other parts of the economy that took place in June and July. Since then, there has been evidence the recovery is weakening, setting the stage for a return to sluggish output.
That view was reinforced by yesterday's report from the Federal Reserve Board showing industrial production rose only 0.1% in September after staying flat in August. Much of the gain came from a burst in automobile production, while output in the mining and utility sectors declined.
A separate report from the Labor Department showed workers were continuing to have their earnings eaten up by inflation. Real average weekly earnings in September edged up 0.1%, but compared with a year earlier earnings were down 0.6%.
Separately, the U.S. Chamber of Commerce released a survey showing that business confidence among its members plunged in October to the lowest level in a year and a half. The survey, based on responses from 7.644 firms, said business expectations for sales, employment, and the general economy in the next six months all fell compared with the last survey in August.