No Fed rate rise expected this week, but events overseas cast a shadow

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http://www.mcclatchydc.com/homepage/story/17365.html

No Fed rate rise expected this week, but events overseas cast a shadow
By Kevin G. Hall | McClatchy Newspapers

WASHINGTON — Unless you planned a vacation to New Zealand, you probably don't care much that its central bank raised its lending rate to a record high earlier this month.

But U.S. Federal Reserve Chairman Ben Bernanke does care, and his concern is likely to arise when the Fed's policy-making body begins a two-day meeting on Wednesday.

New Zealand raised its rate to 8 percent because the global economy, enjoying the longest streak of above-average growth in more than three decades, is so hot that it's sparking inflation, or rising general prices.

Higher interest rates douse inflation, but also slow an economy. If the Fed is forced to raise rates here later this year just as New Zealand has, that would slow the U.S. economy, too.

Bernanke and the Fed are watching New Zealand's central bank because global inflation can pass through to the U.S. economy through import prices. Already the European Central Bank has raised its benchmark lending rate to a six-year high. And Chinese banking authorities are warning that they may raise rates to cool China's overheated stock market. That would raise the cost of making Chinese goods and thus the cost of importing them.

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