WASHINGTON (TheStreet) — The Federal Reserve will not keep interest rates near zero forever and recent signs of the economy's improving health have some investors fretting that day will come sooner rather than later.
Recent economic releases point to gradual improvements across housing, labor and consumer markets, ahead of the Federal Open Market Committee's interest rate decision Wednesday afternoon. The Fed has been reiterating its intention to keep rates low for an extended period, as long as unemployment remains high and the inflation outlook is stable.
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But signs are beginning to mount that those two factors are shifting. Wholesale prices, measured by the producer price index, jumped 1.8% in November, the Labor Department reported Tuesday. That easily outpaces expectations and poses a direct challenge to Bernanke's recent comment that high unemployment would keep inflation concerns subdued. The consumer price index for November, released by the Labor Department Wednesday, met expectations for a rise of 0.4%.
The inflation news comes on top of a November nonfarms payroll report released earlier this month that showed a loss of 11,000 jobs vs. the projected 125,000 decline and the recent moves by the most troubled big banks to climb out from under the government's bailout aid distributed through the Troubled Asset Relief Program last year. Bank of America (Stock Quote: BAC), Citigroup (Stock Quote: C) and Wells Fargo (Stock Quote: WFC) in the past two weeks have taken steps to issue common stock and repay the government's investment.
Although the FOMC is widely expected to keep rates unchanged when it delivers its statement Wednesday at 2:15 p.m. EST, the market will be paying close attention to the language of the decision, trying to gauge how soon the Fed will start unwinding stimulus used to prop up a sagging economy.
"The Fed's last comments in November emphasized that the economy is improving and that inflation is in control. I'd expect the message Wednesday to be similar," said Wayne Schmidt, president and chief investment officer of Gradient Investments, who doesn't anticipate a rate change until mid-2010. "The statement will probably allude to the fact that the economy is getting stronger and growth remains a central concern."
