Analysts Expect Fed To Hold Line

Tuesday, August 22nd 2000, 12:00 am
By: News On 6

WASHINGTON (AP) — With inflation under control and the economy growing at a healthy but less feverish pace than earlier this year, analysts expect the Federal Reserve to hold the line on interest rates Tuesday.

Since June 1999, the Fed has raised rates six times in an effort to slow economic growth enough to keep inflation under control without retarding the economy so much that it brings about a recession.

``The prospects of a Fed rate increase in August look as close to zero as you are ever going to get,'' said Tim O'Neill, chief economist at Harris Bank in Chicago.

Many private economists expected the central bank to repeat its June decision not to boost interest rates. Still, economists believed the Fed would issue a statement telling markets that it is still worried about inflation dangers down the road.

The Federal Open Market Committee, composed of Fed board members and regional bank presidents, was meeting behind closed doors Tuesday to discuss interest rate policy. An afternoon announcement was expected.

With the Fed's sixth rate increase in May, its target for the federal funds rate, the interest banks charge each other, was pushed to 6.5 percent, the highest level in nine years. In June 1999 — before the central bank starting raising rates — the funds rate stood at 4.75 percent.

Those increases boosted banks' prime lending rate, the benchmark for millions of consumer and business loans, to a nine-year high of 9.5 percent, up from 7.75 percent before the Fed's first rate increase 14 months ago.

The Fed passed up the chance to raise rates a seventh time at its last meeting on June 27-28 and economists believe there are more reasons for the central bank to remain on hold this time around as evidence of a slowdown grows.

Many analysts believe the economy, which grew at a surprisingly strong 5.2 percent annual rate in the April-June quarter, has slowed to a growth rate of around 3.5 percent to 4 percent in the current quarter.

In the first seven months of this year, the underlying inflation rate — excluding food and energy, which has shown a big jump this year — has been rising at an annual rate of just 2.6 percent, only slightly worse than last year's 1.9 percent increase in ``core'' inflation.

A major factor in the tame inflation picture has been strong gains in productivity, increased output per hour of work, which allows pay increases without accompanying increases in product prices.

``We are able to have our cake and eat it, too,'' said Sung Won Sohn, chief economist for Wells Fargo in Minneapolis. ``I think the Fed is likely to take a pass on raising rates.''

The most optimistic economists believe the Fed is close to declaring total victory in its 14-month campaign to engineer a soft landing for the economy.

``I think the Fed tightening cycle is over with,'' said Richard Yamarone, economist for Argus Research Corp in New York. ``For the time being, the coast is clear of inflationary pressures.''

But some economists believe Fed meetings after the presidential election on Nov. 15 and Dec. 19 are likely to produce further interest rate boosts — at one of the two meetings, or perhaps even both.

But with few signs that inflation is getting out of hand, the Fed has the luxury of waiting, economists said.

If it has the option, the Fed traditionally prefers to lay low during the heat of presidential campaigns in an effort to avoid accusations that its decisions on the economy are being made to help or hurt a particular candidate.

Because of that, most economists believe the Fed is likely to leave interest rates unchanged at its Oct. 3 meeting, which is only five weeks before the Nov. 7 presidential election.

David Wyss, chief economist at Standard and Poor's DRI in Lexington, Mass., said it was looking more likely that the Fed has achieved something no other central bank has been able to do: two consecutive soft landings for the economy.

In 1994-95, the Fed raised interest rates seven times in a successful effort to keep inflation under control and give new life to an expansion that is now in a record 10th year of uninterrupted growth.

``It looks like a new record. Alan Greenspan will go down as the Tiger Woods of Fed chairmen,'' Wyss said.


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