Originally created 09/25/96

Fed opts to leave interest rates alone



WASHINGTON (AP) - The Federal Reserve, split over raising interest rates, opted Tuesday to do nothing six weeks before voters go to the polls. President Clinton said the decision "shows we have got a strong economy with no inflation."

The central bank's decision followed nearly five hours of closed-door internal debate by the Federal Open Market Committee, the group of Fed board members and regional bank presidents who meet eight times a year to set interest rates.

In advance of Tuesday's meeting, the last before the Nov. 5 election, a number of economists had predicted the central bank would launch a pre-emptive strike against inflation by nudging interest rates higher. It would have been the first increase in Fed rates in 19 months.

While some private economists worried that the central bank's inaction threatened rising prices down the road, President Clinton welcomed the decision as a confirmation of his campaign claims about the U.S. economy.

"It shows we have got a strong economy with no inflation. I am glad about that," Clinton told reporters during a campaign stop in Freehold, N.J.

GOP nominee Bob Dole complained that interest rates under Bill Clinton are still "higher in every category." His running mate, Jack Kemp, had pledged before Tuesday's meeting to "bang on the Fed" if it raised rates.

The reaction in financial markets was mixed. The stock market initially shot up by 50 points, but those gains were quickly whittled away by profit-taking.

The Dow Jones industrial average ended the day down 20.71 at 5,874.03. But the bond market, always worried about the future course of inflation and interest rates, rallied with strong demand pushing the yield on the benchmark 30-year Treasury down to 6.99 percent.

An unprecedented leak last week showed that eight of the Fed's 12 regional banks were pushing for an increase in interest rates. The Fed has reportedly asked the FBI for help in investigating the source of the leak.

Some economists viewed the leak as an effort by inflation hawks at the regional banks to influence the Fed's debate.

"Greenspan probably really resented that leak and it may have made him dig in his heels about any change in policy," said Bruce Steinberg, an economist at Merrill Lynch in New York.

Analysts said the Fed apparently decided in the end that the situation was still too murky to alter monetary policy. The Fed has kept the money supply on hold since Jan. 31, when it made the last of three rate cuts engineered to boost growth.

Since that time, the economy has rebounded strongly, pushing unemployment to a seven-year low of 5.1 percent in August and raising fears that tight labor markets will soon translate into increasing inflationary pressures.

Some private economists believe the Fed has already waited too long by passing up chances to raise rates in July, August and now September.

"The Fed is taking a gamble," said Lynn Reaser, chief economist at Barnett Banks In Jacksonville, Fla. "Their failure to move this summer and early fall may mean that larger steps will be required later this year or in early 1997 to combat inflation."

David Wyss, chief financial economist at DRI-McGraw Hill Inc., said the Fed's delay threatened a replay of mistakes made by past Fed policy-makers where "they ran the economy a little too hot, kept interest rates too low and that eventually set the stage for the next recession."

But those arguing against a rate hike have argued that a variety of factors - from increased global competition to fears about corporate layoffs - mean that unemployment can fall to lower levels than the past without raising inflationary pressures.

The National Association of Manufacturers, one of the most vocal proponents of this view, praised the Fed.

"In making this decision, the Fed listened to Main Street; namely that higher economic growth, employment and wages are possible without accelerating inflation," said NAM president Jerry Jasinowski.