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November 20, 2000

OECD Says Fed May Have to Raise Rates Again Despite Slowing U.S. Economy
By Dow Jones Newswires

OECD Right On Target ... Weiss comments

WASHINGTON - The red-hot U.S. economy is beginning to cool but further interest-rate increases might be needed to further curb demand and stifle nascent inflationary pressures, the Organization for Economic Cooperation and Development said in a regular analysis Monday.

In its latest economic outlook, the OECD also warned the next U.S. administration to resist the temptation to spend the enormous projected budget surpluses given it would only further stimulate an economy running at full capacity.

The OECD expects growth in U.S. gross domestic product to slow to 3.5% next year and 3.3% in 2002, compared with a projected expansion of 5.2% in 2000.

Demand, it says, has outstripped supply 'in recent years' and resulting labor-market constraints threaten to add further fuel to a pickup in inflation seen from higher oil prices.

'In view of the prospects for increasing core inflation and in order to check inflationary expectations, some additional monetary tightening may be called for,' the OECD said.

The U.S. Federal Reserve's Open Market Committee decided to hold the key federal-funds rate at 6.5% at last week's policy meeting, although the committee announced it would retain a bias in favor of further tightening.

The OECD is right on track when it says that, despite a slowing economy, the Fed will have to raise rates to guard against inflation. Record low unemployment, rising fuel costs, and continued threats to the dollar are all factors that point to higher inflation in the coming months, even as the economy looses steam.

Most Wall Street pundits are loudly predicting that the Fed's next move will be to ease rates. They've already priced the move into stocks. But, then again, they were wrong when they expected the Fed to change its bias toward further rate hikes at last week's meeting. After last week's announcement, the market stumbled badly. The reaction will be much stronger when the Fed actually raises rates -- especially if the negative sentiment that's in the market today carries on for the next few months.

As the bear market drags on, the market punishes every company stock that has even the slightest bad news surrounding it. Today, for instance, the indexes are bleeding red because of downgrades. Any smart investor could tell you that the economic slowdown hurts company earnings. The downgrades merely give investors a reason to sell. While right now, very few are looking for a reason to buy.

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