A leading insurance industry Federal Reserve Board watcher says the Fed needs to keep a close eye on prices.
Kurt Karl, chief economist for the New York-based U.S. operations of Swiss Reinsurance Company, had predicted earlier this week that the Fed might increase the target fed funds rate as much as 0.5 percentage points, to 5.5%.
The Fed ended up increasing the target rate only 0.25 percentage points, to 5.25%.
Nevertheless, "with the unemployment rate falling, capacity utilization rising, high oil prices and a weak dollar, core inflation has been rising," Karl says in a statement about the 0.25-point increase. "The Fed needs to act now to avoid larger inflationary problems later."
Karl expects the Fed to increase the target fed funds rate another 0.25 points in August.
Even if the Fed wanted to hold off, central banks in Europe, China and Japan probably will try to increase their countries' interest rates, and that will lead to an increase in long-term interest rates, Karl predicts.
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