Fed Pause Backed by Inflation Data

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The New York Sun

Prices paid to American producers excluding food and energy unexpectedly fell in July, the first piece of evidence backing the Federal Reserve’s forecast that inflation will slow.

The so-called core rate dropped 0.3%, the first decrease since October, the Labor Department said yesterday in Washington. None of the 60 economists surveyed by Bloomberg News forecast a decline. Overall prices gained 0.1%.

Bonds and stocks jumped and the dollar sagged as traders seized on the report to speculate that the Fed may keep interest rates stable at its September meeting after ending a two-year tightening campaign last week.

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Investors’ attention will now focus on tomorrow’s consumer–price report; another less–than–expected reading would be a further sign Chairman Ben Bernanke was right in advocating a pause.

“The numbers buy Bernanke some time,” the chief economist at FTN Financial in New York, Chris Low, said. “The criticism of the Fed has been that the economy was slowing but inflation was picking up, and Bernanke has been saying that inflation works with a lag.”

Price declines last month were led by new cars, computers and men’s clothing, the Labor Department said. The index measures prices paid to factories, farmers, and other producers.

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In a sign of softening economic growth, confidence among American homebuilders slid to a 15-year low this month as buyers cancelled orders and the supply of unsold dwellings increased. The National Association of Home Builders/Wells Fargo index of builder confidence fell to 32 from 39 in July, the Washington-based association said yesterday.

Yesterday’s figures prompted economists to cut forecasts for the consumerprice report, the broadest measure of inflation because it includes the cost of services as well as goods.

“The Fed exposed itself to some risk if the numbers don’t cooperate, and today’s report diminishes that risk a bit,” the chief economist at Goldman in New York, Jan Hatzius, said.

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