Fed Leaves Interest Rates Unchanged

Wednesday, June 28th 2000, 12:00 am
By: News On 6

WASHINGTON (AP) — The Federal Reserve, amid signs that the red-hot economy may be cooling a bit, decided Wednesday to leave a key interest rate unchanged.

As a result, the federal funds rate will stay at 6.5 percent, the highest level in nine years. The funds rate is the interest that banks charge each other on overnight loans.

The central bank's decision came after a two-day closed-door meeting of the Federal Open Market Committee, the officials, including Fed Chairman Alan Greenspan, who set interest rate policy.

Investors, who had been anticipating the no-increase stance, reacted calmly. The Dow Jones industrial average and Nasdaq index both were up about 80 points just before the Fed's announcement, and both gained a few points immediately afterward.

In a statement, explaining its decision, the Fed said recent data ``suggest that the expansion of aggregate demand may be moderating toward a pace closer to the rate of growth of the economy's potential to produce.''

But, in the part of the statement that reflects possible future moves, the central bank warned that inflation dangers may be lurking and it hinted that higher rates could be forthcoming.

The Fed said it believes the ``risks continue to be weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future.''

Stuart Hoffman, chief economist at PNC Financial Services Group, said the Fed in that language is ``simply telling the markets that it is still alert to a pickup in inflation and is ready to act if the central bank see any signs of inflation.''

Without a boost to the key funds rates, commercial banks won't feel the need to raise their prime lending rate, a benchmark for millions of loans, from home equity and unpaid credit card balances to short-term loans for businesses.

The prime rate stands at 9.5 percent, its highest level since January 1991, when the country was in its last recession.

Over the last year, the Fed has been boosting interest rates in an effort to slow the economy and keep inflation from escalating.

Recent economic reports suggest the Fed's increases are working: The nation's unemployment rate rose to 4.1 percent in May, up from a 30-year low of 3.9 percent in April; retail sales were lackluster the past two months; and the housing market has slowed a bit.

Many economists believe the economy, which was roaring ahead at a 5.4 percent growth rate in the first three months of this year, may have slowed to 4 percent rate or less in the current quarter.

But the Fed doesn't want a repeat of the last two years, when growth slowed in the spring only to reaccelerate sharply for the rest of the year, economists said.

Given that, some economists believe that Fed policy-makers may need to boost rates at their Aug. 22 meeting to keep the economy on an even keel.

Even though the Fed decided not to raise rates this time around, the central bank 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.''

Merrill Lynch's chief economist Bruce Steinberg, however, believes the Fed is done boosting rates this year on the belief that ``those tentative signs of moderation will become definite signs in coming months.''

Greenspan and his colleagues are seeking to achieve a ``soft landing,'' in which growth slows enough to keep inflation under control but not so much that it threatens the country's record 9 1/2 -year economic expansion.

At its last session on May 16, the Fed boosted rates by a half-point, double the normal quarter-point moves. That pushed its target for the federal funds rate, the interest banks charge each other, to 6.5 percent.

The Fed has raised rates six times since June 1999, when the funds rate stood at 4.75 percent.