Economy's Rebound Threatens to Stir New Inflation Pressures, Higher Rates
NEW YORK -- The economy's vigorous rebound since March is threatening to spark renewed inflationary pressures and further increases in interest rates, according to economists and investment managers.</br></br>The frenzied rush of borrowing by businesses and consumers is likely to continue, setting the stage for another surge in the nation's money supply, many bankers and analysts warned. Some contended that the Federal Reserve System will tighten further its credit clamp in an effort to slow business activity to a noninflationary pace.</br></br>Intensifying the pressures on the credit markets are the federal government's massive financing needs to cover its budget deficits. This week, the Treasury will auction $16.5 billion of securities, consisting of three-year notes, 10-year notes and 30-year bonds. Some analysts predicted that the government will have to pay about 13.25% on the 30-year bonds, the highest since a record 14.56% at a February 1982 sale.</br></br>Interest rates surged and bond prices plunged Friday after the government reported unexpected strength in employment and hours worked in April. "It's quite a debacle," said Frederick W. Kingsley, a vice president at Aetna Life & Casualty Co., Hartford, Conn. Investment managers "are nailing their windows shut."</br></br>Investors are on a "buyers' strike," said David Hale, chief economist at Kemper Financial Services Inc., Chicago. "And the stalemate could last quite a while." Until there is a major reduction in the federal government's budget deficits, investors "will demand higher and higher yields as compensation for the risk of inflation," he predicted.