Interest Rates Likely To Stay Same

Tuesday, June 27th 2000, 12:00 am
By: News On 6

WASHINGTON (AP) — After six increases over the past year, the Federal Reserve is expected to pass up the opportunity to raise rates again this week. But many economists believe Fed policy-makers will put markets on notice that this is simply a pause and not the end of their credit-tightening campaign.

``The likelihood is high that the Fed will have to tighten further,'' said Mark Zandi, an economist at RFA Dismal Sciences in West Chester, Pa. ``The economy is still growing too strongly to suit their tastes.''

The Federal Open Market Committee, composed of Fed board members and regional bank presidents, began meeting Tuesday and will conclude their two days of closed-door discussions with an announcement around 2:15 p.m. EDT Wednesday.

At their last session on May 16, the Fed boosted rates by a half point, double the normal quarter-point moves, pushing its target for the federal funds rate, the interest banks charge each other, to 6.5 percent, the highest level in nine years.

The Fed has raised rates six times since last June, when the funds rate stood at 4.75 percent. Those increases have pushed banks' prime lending rate, the benchmark for millions of consumer and business loans, to a nine-year high of 9.5 percent.

Fed Chairman Alan 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 jeopardizes the country's record 9 1/2 -year economic expansion.

There have been recent signs that the Fed's strategy is working, such as retail sales falling for two consecutive months and the unemployment rate rising in May to 4.1 percent, up from a 30-year low of 3.9 percent.

And on Tuesday, the Conference Board in New York reported that its consumer confidence index, after hitting a record high, fell to 138.8 in June, a decline blamed on rising interest rates and higher gasoline prices.

Many economists believe that 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 Fed officials still have to be convinced that the spring slowdown is temporary and not a repeat of the last two years, when growth slowed in the spring only to reaccelerate sharply for the rest of the year.

``Some of the recent slowdown has been due to bad statistics or temporary factors,'' said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

In addition to the debate over whether growth has really slowed, Fed policy-makers are also engaged in discussions over just how much of a slowdown will be needed to keep inflation in check.

Fed Governor Laurence Meyer raised the possibility in a recent speech that the Fed may need to bring about ``a period of below-trend growth'' to keep inflation in check, comments that were viewed as indicating that Meyer may be urging more rate increases to push growth down and unemployment up significantly from its current 4.1 percent level.

If the Fed as expected passes up a rate increase Wednesday, many economists believe there will be a rate hike of a quarter-point or even a half-point on Aug. 22, a session that will come after both parties have held their political conventions.

While conventional wisdom holds that the Fed does not like to change interest rates as a presidential election heats up, analysts believe the central bank will run that risk to make sure inflation is being controlled.

A study by the Financial Markets Center, a research institute in Philomont, Va., showed that the 1.75 percentage point increase in rates already engineered by the Fed exceeds the rate increases of all previous pre-election periods over the last four decades with the exception of 1967-68, when inflation was rising rapidly at the height of the Vietnam War.

Sixteen House Democrats wrote Greenspan and his colleagues earlier this month to warn that further rate hikes would lead to ``increases in unemployment and real economic damage to our least prosperous citizens.''

Despite the political fallout, David Jones, an economist at Aubrey G. Lanston & Co., said he believed the Fed would boost rates by a quarter-point in August and by another quarter point after the election, in either November or December.

``The odds are 50 percent or slightly higher that the Fed will achieve its soft landing,'' Jones said.