Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: FRIDAY, March 18, 1994 TAG: 9403180272
SECTION: BUSINESS PAGE: B-5 EDITION: METRO
SOURCE: Associated Press
DATELINE: NEW YORK LENGTH: Medium
These days, about the only thing inflated is anxiety.
Many Wall Street traders, investors and even homeowners have been acting as if inflation is a 500-pound gorilla about to stomp out their investments.
But a growing number of economists say it's time for the inflation fretters to come down to earth - along with the interest rates they have pushed sharply higher.
``It's a little puzzling. Why is the market ignoring all this good news?'' asked Edward Yardeni, chief economist at C.J. Lawrence Deutsche Bank Securities Corp. ``There are a lot of powerful forces at work to keep inflation down.''
Because of anxious financial traders, long-term interest rates have jumped one-half percentage point so far this year - and the higher rates have rattled everyone from mutual-fund investors to prospective homeowners.
A surge in economic growth in late 1993 initially triggered the anxiety. The potential inflation sign led some to question the prevailing notion that consumer prices will rise around 3 percent in 1994 for the third consecutive year.
Then, on Feb. 4, the Federal Reserve Bank decided to push up a key short-term interest rate for the first time in five years - with the stated purpose of keeping inflation pressures in check.
In theory, the central bank action should help keep a lid on long-term rates. That's because bond buyers who are confident that the Fed will control inflation presumably would accept lower yields for committing their money over a long period of time.
But it didn't turn out that way. Instead, bond traders busily searched for evidence to confirm the Fed's suspicions about looming price pressures in the economy, said Lynn Reaser, chief economist at First Interstate Bancorp in Los Angeles.
Stan Carnes, chief portfolio strategist for financial services at Lehman Brothers Inc., said the anxiety riveted attention on less reliable indicators of economic activity - diverting focus from low labor costs and other major signs of benign inflation.
The overreaction in the financial markets spread to ordinary Americans. Because the initial spike in bond yields pushed up mortgages rates, people have hurried to purchase houses before rates go any higher, contributing to a home-buying boomlet.
In addition, investors in U.S. government and mortgage-backed securities cashed out $1.94 billion from mutual funds in the five weeks ended March 9 - nearly 2 percent of total assets, according to AMG Data Services, a fund-flow tracking firm based in Arcata, Calif.
Driving investors' fears is the knowledge that further sharp rate rises on new securities could hurt the value of bonds already bought. But some strategists say that day may be slow in coming.
``Investors are putting an extraordinarily high inflation premium into long-term interest rates,'' said Thomas Steffanci, director of fixed-income at Fidelity Investments, the nation's largest mutual fund company.
``Our view is that long-term interest rates are too high ... and that they are going to be lower, perhaps substantially so, by the end of the year.''
Bond market participants may be starting to get the message. Back-to-back reports of low inflation sparked a bond-market rally this week that sent bond yields briefly plunging for the first time in weeks.
The Labor Department reported Wednesday that consumer prices rose only 0.3 percent in February after stagnating in January.
by CNB