Fed Alert to Impending Inflation

WASHINGTON -- The Federal Reserve didn't raise interest rates this time, but Fed policy-makers left little doubt they are growing increasingly worried that the sizzling U.S. economy could generate inflation troubles down the road.

Some private economists said they expect not just one, but two more rate increases in coming months as the central bank tries to slow economic growth to a safer speed.

"I think that it is in the cards for a rate hike in November, and there is a chance we will see another rate hike early next year as strong growth continues," said David Jones, an economist with Aubrey G. Lanston and Co.

Warning on Tuesday that it is remaining "especially alert" to any inflation dangers coming from the tight labor market, the Fed switched its policy directive, intended to signal future moves, from neutral to a tilt toward higher rates.

"The growth of demand has continued to outpace that of supply, as evidenced by a decreasing pool of available workers," the Fed statement said.

With the nation's unemployment rate at a 29-year low of 4.2 percent, some companies are having a difficult time finding qualified workers to fill vacancies.

Those conditions are leading some companies to woo workers with higher wages and benefits. While that's good news for workers, it's worrisome to the Fed because those increased costs could drive up prices and spark inflation.

Some economists believe the nation's unemployment rate in September, a figure that will be released Friday, could fall to 4.1 percent.

"Unless there is an abrupt slowdown in labor-market activity, the die appears to be cast for another rate hike," Allen Sinai, chief economist at Primark Global Economics, said.

Fed policy-makers meet next to review interest rates Nov. 16. The Fed's statement raising the prospect of worries over inflation pressure and its decision to switch its policy directive "reinforces the probability of a third rate hike on Nov. 16," First Union chief economist David Orr said. "We would put the odds at 60 percent."

But much depends on what a slew of economic data out between now and then - including two employment reports and several inflation reports - says about the nation's economy and the prospects for inflation, economists said.

Many analysts said they believed a November rate increase could be followed by a fourth rate boost early next year, probably in January, as the central bank continues moving to slow growth enough to ensure that tight labor markets don't start pushing wages and prices higher.

"The Fed is clearly more worried about inflation than they were in August," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. "The Fed recognizes that there is more work to be done."

The Fed's warning sent stock prices on a wild roller-coaster ride during the final two hours of trading Tuesday, swinging from a gain of 106 points immediately before the Fed announcement to a 124-point loss. The Dow then rebounded to finish the day down just 0.64 point at 10,400.59.

Stocks had posted a 128-point gain Monday on hopes that the Fed would not raise rates and would maintain its neutral policy directive.