Business

Fed in jam as prices climb, growth crawls

Wholesale prices barreled ahead while housing and industrial activity faltered – a blend of high-costs and slow growth that ensures the Federal Reserve's most likely move on interest rates next week will be no move whatsoever.

There's some Catch-22 for the Fed in all of this, and Chairman Ben Bernanke and his colleagues have made increasingly clear they're not inclined to cut interest rates further for fear of aggravating inflation. On the other hand, if they act too quickly at the June 24-25 meeting to boost rates to fend off inflation, it would hurt an economy already battered by housing, credit and financial woes.

“The Fed is in a box,” Ken Mayland, president of ClearView Economics, said after the latest batch of economic barometers were released Tuesday. That's why many economists are predicting the Fed will hold rates steady at 2 percent, a four-year low, at next week's session.

The Labor Department's Producer Price Index, which measures the costs of goods before they reach store shelves, leaped 1.4 percent in May, the biggest increase in six months. Galloping energy and food prices, which are especially squeezing business profits, figured prominently in the index's pickup.

The economy's problems and high prices for fuel and raw materials are taking a toll on manufacturers and others.

The Federal Reserve reported that industrial productions fell 0.2 percent in May, the second straight monthly decline. Plants operated at only a 79.4 percent capacity, the lowest since September 2005 after the Gulf Coast hurricanes. And, there was more fallout from a deeply depressed housing market.

The number of new housing projects started in May fell 3.3 percent to a 975,000 pace – the lowest in 17 years – as builders pulled back further. Builders are smarting as unsold homes as well as foreclosed homes pile up, adding to already swollen supply. Sagging demand from would-be buyers and – more recently – rising mortgage rates, are adding to builder headaches.

“Builders are doing exactly the right thing – cutting back,” said David Seiders, chief economist at the National Association of Home Builders. “Now I'm a little more worried on the interest rate front. I think we'll see mortgage rates recede to some degree. If not, it will be a tougher road for housing than anticipated,” Seiders said.

The housing slump has been the biggest drag on the economy, which has slowed sharply in recent months.

The Fed and the Bush administration are hoping that the central bank's powerful rate cuts since last September – which take months to work through the economy – along with the government's $168 billion stimulus effort – will help lift the country out of its doldrums. It's a gamble, though, as expensive food and gas could force people and businesses to hunker down even further.

Some fear that the nation could be headed for a bout of “stagflation,” a toxic mix of stagnant economic growth and inflation not seen in decades. But Bernanke – who has ramped up his tough anti-inflation talk over the past few weeks – has said that's not the case. Bernanke also has said he doesn't see a repeat of a 1970s-style situation where workers demanded – and received – big pay increases to cover rapidly rising prices.

Still, there are growing concerns that rising energy and food costs will eventually force companies to boost prices for lots of other goods and services, spreading inflation through the economy. That's why Wall Street investors predict the Fed will be forced to boost rates later this year to combat inflation. Others, however, think the Fed won't have to start to raise rates until next year.

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