Economists Expect Rate Increase

Thursday, June 29th 2000, 12:00 am
By: News On 6

WASHINGTON (AP) — The Federal Reserve declared a cease-fire in its battle against inflation, deciding that another interest-rate increase is unnecessary right now. But some economists expect the Fed to resume the attack as early as August.

Fed Chairman Alan Greenspan and his colleagues opted to leave short-term interest rates unchanged Wednesday, pointing to tentative signs that U.S. economic growth is slowing.

At the same time, the Fed hinted that further rate increases could be possible should inflation pressures worsen. ``The risks continue to be weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future,'' the Fed said in a statement.

And, while the Fed did say that increased productivity gains had kept price pressures from being a serious problem thus far, it did note that underlying inflation rates were now ``rising slightly faster than a year ago.''

Against that backdrop, many economists said they continue to believe it's likely the Fed will raise rates by a quarter-point or even a half-point at its next scheduled meeting on Aug. 22. That's because those analysts don't foresee the economy slowing enough to keep inflation in check. Some forecast another quarter-point increase after the election.

``With the expansion throttling back and inflation not a major problem, it only made sense to pass. But that does not mean the Fed is done,'' said economist Joel Naroff of Naroff Economic Advisors. ``The extent of the economic moderation is not at all clear.''

Even though the central bank's statement suggested that growth may be cooling a bit, the Fed went on to say that it's too early to tell whether such moderation will continue.

In its statement, the Fed said ``signs that growth in demand is moving to a sustainable pace are still tentative and preliminary, and the utilization of the pool of available workers remains at an unusually high level.''

The fear at the central bank is that employers seeking to fill vacancies will offer inflationary wage increases to attract the dwindling supply of available workers.

``The Fed has clearly not fully bought into the slowdown scenario,'' said First Union economist Mark Vitner.

There have been some signs the economy is slowing: The nation's unemployment rate rose to 4.1 percent in May from a 30-year low of 3.9 percent in April and retail sales were lackluster the past two months.

The Fed's decision spelled good news for millions of borrowers since it means that for now short-term interest rates tied to banks' prime lending rates will be unchanged.

The prime rate is currently at a nine-year high of 9.5 percent, up from 7.75 percent where it stood last June 30 when the Fed began its credit-tightening campaign.

At its May 16 meeting, the Fed boosted the funds rate by a half-point, double the quarter-point moves it had been making, amid worries that the previous rate hikes were doing little to slow the booming economy.

The funds rate, the interest that banks charge each other on overnight loans, now stands at 6.5 percent, up from 4.75 percent where it had been before last June 30.

Observed Jerry Jasinowski, president of the National Association of Manufacturers: ``The Fed's decision not to raise rates reminds me of an old Fourth of July fireworks ad, `safe and sane.' ''