Inflation Worries Dwindle Yet Fed Likely to Tighten

WALL Street is breathing slightly easier now inflation concerns have lessened. And while most stock analysts expect the Federal Reserve Board to tighten interest rates again - perhaps as early as tomorrow - there is a growing perception that not many more interest rate hikes will be needed this year to ward off inflationary pressures.

The Fed's Open Market Committee meets May 17. The Central Bank is expected to boost short-term rates, according to Ian Borsook, senior economist with Merrill Lynch & Company, an investment house. But such a hike ``has already been widely anticipated'' and should not hurt financial markets, he says.

What should be most reassuring to Wall Street, Mr. Borsook says, is that the latest economic numbers show that the economy will continue to expand in 1994 and 1995 without any significant increase in inflation.

``We continue to see good numbers. We have a gap between potential [economic growth] and actual growth,'' Borsook says. ``There is still plenty of room for expansion'' without inflation. Merrill Lynch expects the consumer price index to rise a modest 2.6 percent in 1994 and 3.1 percent in 1995.

On Friday, the Labor Department announce that consumer prices rose 0.1 percent in April, well below increases of 0.3 percent in both February and March. The April consumer price report was the second piece of upbeat news on inflation last week; on Thursday the Labor Department announced that wholesale prices fell 0.1 percent in April.

The Thursday news on wholesale prices helped rally stock and bond markets. On Friday, the Dow Jones industrial average closed down 9.82 for the week at 3,659.68 points.

``Once we get the Federal Reserve Board decision [on a new rate hike] off the market's back, we will be prepared for a summer [stock] rally,'' says Gene Jay Seagle, president of Tactics and Technics, a market consulting firm in Weston, Conn. ``The market was held back somewhat Friday because many investors want to see what the Fed does'' tomorrow, Mr. Seagle says.

Seagle says another rate hike is likely, but the market should then start to rally. He expects the Dow to reach 3,800 points to 3,850 points by late summer. That, however, would still be below the market's high this year of 3,978.36 points on Jan. 31.

Not all market observers remain sanguine about either the likelihood of low inflation or a prospective upturn in market indexes, however. James Stack, who publishes InvesTech, a newsletter, says that the economy is not yet off the hook in terms of inflationary threats. Mr. Stack notes, for example, that a number of commodities, including copper, scrap steel, and oil, are climbing in price, some setting record highs. Moreover, several popular indexes that measure inflationary pressures are now at high levels, including a survey by Columbia University's business school, and Ned Davis Research, a private firm.

The Columbia survey, the ``CIBCR's leading index of inflation,'' (undertaken by the Center for International Business Cycle Research), is ``at the highest level in over a decade,'' Stack notes. For that reason, Stack does not rule out additional rate hikes by the Fed during the remainder of this year.

A number of industrial companies are raising prices in anticipation of future inflation, as well as rising commodity prices; such companies include auto manufacturers Ford, Nissan, and Honda. The three auto companies have announced hikes in prices on their 1994 models.

Market technicians who follow the market's daily ups and downs, note that many investors have been moving to ``defensive stocks,'' such as retail establishments, food companies, and pharmaceutical manufacturers, which tend to do well regardless of changes in national economic patterns. ``People always have to buy necessities,'' Borsook says.

Retail store revenues dropped in April from March levels. But the slight dip, experts say, occurred in part because the Easter holiday came in early April, forcing many consumers to shop for spring clothing in late March. Retailers, including both small stores, and ``mom and pop'' family stores as well as large national chains, are expected to do well in 1994, no matter what happens on the inflation front.

Other sectors expected to do well irrespective of inflation are food companies, restaurant chains, and furniture, fixture and other household-related companies. Companies that could be adversely affected by higher inflation, however, include cyclical companies, such as heavy duty manufacturers.