Possibility of a Fed Easing Debated
WASHINGTON - June's retreat of wholesale prices and decline in retail sales leave room for lower interest rates if the nascent recovery sputters, economic analysts said.
"This pushes the evidence a little bit more toward a weak recovery and the possibility that the Fed will have to ease credit some more," said Robert McGee, economist at Tokai Bank, in the wake of the release of the latest economic indicators.
In a sign of slow demand, the Labor Department, said the producer price index fell by an unexpected 0.3% last month.
The drop brought the wholesale inflation rate to minus 1.5% on an annualized basis thus far this year, versus an 8.2% spurt during the Gulf crisis in the 1990 second half.
Dip in Retail Sales
But fears that the economy will falter as it emerges from recession were fueled by the U.S. Commerce Department's report that June retail sales fell 0.2%. Analysts had expected a 0.5% June gain in sales. May sales were revised down to a 0.8% gain from the previously reported 1% increase.
The U.S. Chamber of Commerce took a pessimistic reading of the reports. "The economy is not undergoing a sustainable recovery," said its economist, Lawrence Hunter. "Falling consumer spending could create a double-dip recession."
Some analysts fear that the return to modest growth, signaled by the recent upturn in housing and a pickup in factory production, will be short-lived and that relatively tight credit will cause another downturn later this year.
While this is not the predominant view, economists said the calming of inflation gives the central bank leeway to stimulate growth if the recovery appears threatened.
Concern on Inflation
The Fed, after easing its monetary policy earlier this year, has proved reluctant to lower rates further for fear of igniting inflation.
"This certainly shuts down the hawks," said Donald Ratajczak, the Georgia State University economist, referring to those who want the Fed to hold inflation down irrespective of interest rates.
The long bond rates have climbed in recent months, in part based on fear that the Fed's easing to combat recession would fuel inflation. Fed Chairman Alan Greenspan has warned that the high long-term rates restrain the central bank's monetary policy.
With a couple of more months of good inflation figures, Mr. Ratajczak said, long bond rates should fall. "There is no reason for long bonds to be above 8%."