It is a foregone conclusion that when the Federal Open Market Committee (the Fed's policy-setting arm) meets Wednesday, it will likely move to raise the short-term rate. All the good omens that the Fed has been waiting for so patiently -- job growth included -- seem to have materialized. In addition, stronger labor markets and higher commodity prices are also forcing the Fed to contend with the prospect of inflation.
The market may have already priced in a 25-basis-point rate hike this month, but the outlook for longer-term monetary policy is less certain. While Fed Chairman Alan Greenspan has spoken about raising rates at a "measured" pace, in recent days it has become increasingly clear that if the inflation numbers warrant it, the Fed is poised to raise rates at a less leisurely speed.
The latest UBS/Gallup Index of Investor Optimism Survey* provides some insight on what American investors think about Fed policy and the possibility of price inflation in the months to come.
Two-Thirds of Investors Reconciled to Rising Rates
According to the June investor survey, 66% of investors expect the Fed to increase interest rates in the next three months, 27% expect they will hold them at their current level, and 5 % believe they will cut them.
However, though most investors are largely reconciled to the idea that the Fed will probably raise rates over the next three months, the majority of investors also disagree that a rate hike in the near future is necessary. Only 34% of investors believe that the Fed should raise rates, while 52% believe that rates should be maintained at their current level and another 11% advocate rate cuts.
Inflation a Serious Problem
With stories about rising gas prices grabbing headlines, the inflation scare is making news -- and investors are taking it seriously. Three in five investors (60%) consider inflation to be a serious problem for the U.S. economy. Eighteen percent go so far as to say rising prices are a "very serious" problem, while 42% categorize it as "somewhat serious."
Depreciating Portfolios
As 6 in 10 investors call inflation a serious economic problem, it's no surprise that a substantial number -- 47% -- are worried that it will hurt their investment portfolios. Of the investors surveyed, 12% are "very worried" that inflation will depreciate their portfolio holdings. Another 35% say that they are "somewhat worried."
Sixty-one percent of investors also believe that inflation is hurting the investment climate to some extent. This percentage is unchanged from last month.
Bottom Line
Some analysts argue that though the recently released CPI numbers have come in above consensus, this increase represents a one-time shift and that prices will stabilize at these levels. Gallup data indicate, however, that investors are not so sure inflation is under control. At 1.7%, the core inflation number seems to be under control. And while the Fed will only react if this measure crosses the 2% threshold, the majority of investors believe that inflation is already a serious economic problem.
*Results for the total dataset are based on telephone interviews with 802 investors, aged 18+, conducted June 1-16, 2004. For results based on the total sample of investors, one can say with 95% confidence that the margin of sampling error is ±4 percentage points.
