that the economy will cool off on its own, eventually leading to much slower growth by the third quarter of 2000, negating the need for Fed action. Further, he predicts consumers will be forced to cut back their spending, and use that money instead to reduce personal debt.
INFLATION: CREEPING UPWARD
After modest increases of 1.7% and 1.6% in 1997 and 1998, the CPI edged over 2% in 1999 and further inching up is likely in 2000. “Inflation seems to be under control,” says Rodgers, who sees the CPI rising about 2.4% in 2000. “That won’t be enough for a major disruption in the markets.” To put things into perspective, inflation rose from 2.5% in 1995 to 3.3% in 1996 and the S&P 500 posted a 23% gain in 1996.
If inflation is in the 2% to 2.5% range, it will be below the level feared by some alarmists. “Despite all the warnings about consumer spending, inflation hasn’t been a problem and likely will stay near current levels,” says Atlantic Capital’s Okomo. He explains that technological innovations will help companies enjoy productivity gains, which, in turn, will help companies increase wages to workers, yet they’ll be able to hold down prices on goods and services.
Other factors will work in the other direction, keeping upward pressure on inflation in 2000, Eley says. “The dollar has decreased, especially against the Japanese yen, and that probably will mean higher costs for foreign goods imported into the U.S. In addition, federal workers recently received a large wage increase, which may add to inflationary wage pressures througho
ut the economy.”
The highest inflation figures are offered by Burks, who sees price levels slowly increasing over the next two to three years. “I don’t think inflation will get out of hand, as it did back in the 1970s, but I think inflation could gradually increase to 4% or even 4.5% within seven to eight years as the economic expansion continues,” he says.
Rising inflation generally means higher interest rates, but none of our respondents anticipates a big spike in rates. “Interest rates probably will be flat to a bit higher in 2000,” Okomo says. “The Fed has increased interest rates twice [in 1999] and may act again if the job market stays tight and the dollar remains strong. Thus, short-term rates might move up. However, long rates are unlikely to move higher if there is a widespread belief that the Fed is keeping inflation under control.”
A similar view is expressed by Eley, who says that further tightening by the Fed is likely to ward off rampant inflation, so short-term interest rates may edge up another 25 basis points. He thinks yields on long-term bonds will stay near current levels of 6.25% to 6.35%.
Bolton expects rates on three-month U.S. Treasury bills to inch up toward 5% in 2000, while the yield on the 30-year U.S. Treasury might top 6.5%. Burks argues that interest rates are higher now than they were a year ago and are unlikely to rise further. “Some increase in