Lower US costs fuel rate hopes

DIANE COYLE

Economics Correspondent

A fall in prices charged at the factory gate last month and a rise in unemployment claims last week renewed hopes of a cut in US interest rates before the year-end. Prices fell for the third time in five months.

Backing for expectations that the Federal Reserve will soon reduce its key short-term interest rate came from Martin Feldstein, the US economist. Speaking at a seminar in London, the Harvard professor and former chairman of the Council of Economic Advisers under President Reagan said: "I think we will see a cut in the Federal Funds rate after the budget is settled."

Share prices surged again yesterday with the Dow Jones Industrial Average closing at another record high, up 12 points at 4,864.

However, concerns about the danger of a temporary default on US Treasury bonds took the bond market lower and led to a tumble in futures prices.

The Clinton administration and the Republican-dominated Congress are locked in a bitter battle over plans for budget cuts, with Congress obstructing an increase in the government's debt ceiling. Most observers still think there will be a budget agreement before long. But it will not happen in time for next Wednesday's meeting of the Fed's policy committee.

Professor Feldstein said there could be an agreement before the Fed meeting on 19 December. However, he predicted that the next reduction in US interest rates would be the last. Increasing inflationary pressures would lead the Fed to start increasing rates after next November's presidential election.

Many Wall Street analysts disagree, greeting yesterday's figures as evidence of the absence of any inflationary threat.

John Williams, chief economist at Bankers Trust, said: "There is no evidence of any current inflation and none in the pipeline."

The benchmark long-term bond yield remained near its lowest level since the beginning of 1994. Alison Cottrell, an analyst at Paine Webber, said: "It would take an astonishingly bad figure to deflect the bond market from its optimism."

Prices charged by producers fell 0.1 per cent in October. "Core" prices, excluding food and energy, were flat. The price of crude goods rose 0.3 per cent after a 1.9 per cent jump in September. New jobless claims rose unexpectedly to 375,000 last week, the highest since the end of July.