Originally created 07/03/97

Fed policy-makers make no change in interest rates

WASHINGTON (AP) - Federal Reserve policy-makers decided today to let the economy's good times roll into the summer without a dampening dose of higher interest rates.

The central bank announced it had adjourned a meeting of its policy-setting Federal Open Market Committee and had nothing further to say. Since it announces rate changes, the statement means the Fed left the benchmark federal funds rate on overnight loans between banks at 5.5 percent.

"Borrowers will be happy to know that the Fed appears to be taking a summer vacation from interest-rate adjustments," said economist Tim O'Neill of Harris Bank/Bank of Montreal.

Stocks, which had been down slightly before the announcement, rallied briefly and then sank back to their pre-announcement level. Bonds, which had been doing a little better, weren't much affected.

In advance, economists were widely expecting the decision, although some were uneasy and believed a modest increase in short-term rates would do little harm and would help prevent inflation from accelerating later this year and next.

The Fed rattled Wall Street after its March 25 meeting by raising the rate a quarter percentage point. It was the first increase in two years. But, just as it did today, it opted at its May 20 meeting to leave the rate alone.

Since then, nearly everything fell into place to buy policy-makers time to watch and wait. Inflation has decelerated even though the economy expanded at a rapid 5.9 percent annual rate in the first three months of the year, the fastest pace in nearly a decade, and unemployment dropped to 4.8 percent in May, nearly a 24-year low.

Falling energy prices held consumer inflation to a scant 1.4 percent annual rate during the first five months of this year, down from 3.3 percent for all of last year. Even stripping out volatile food and energy costs, the inflation rate is just 2.6 percent so far this year, the same as last year.

And the danger of an immediate inflation breakout appears to be receding. A variety of statistics, most notably retail sales, suggest growth in the April-June quarter slowed sharply to around a 2 percent rate.

In the latest sign of moderation, the Commerce Department said today that orders to U.S. factories fell 0.7 percent in May, the second decline in three months.

Still, there are voices cautioning Fed Chairman Alan Greenspan and his colleagues that now is no time for complacency about inflation, that growth will rebound in the second half of this year.

Economists on an American Bankers Association panel warned last week that economic growth over the past year has created wage pressures that could threaten the current low level of inflation.

"Taking action to raise rates would be an appropriate step," said economist Joel Naroff of First Union Corp. of Charlotte, N.C.

A week earlier, the International Monetary Fund said that several factors restraining inflation are "likely to wane in the period ahead," necessitating "a moderate tightening of monetary conditions in the near future."

These factors include sluggish economies overseas, which had kept pressure off world commodity prices, and the appreciating dollar, which restrained import costs. But the economies of Europe and Japan are perking up and the dollar's value peaked two months ago.

Other analysts believe the second-half bounce-back in the United States won't be strong enough to aggravate price pressures and see little need for higher rates.

Nevertheless, the Fed probably will nudge rates higher just to be sure, if not at its Aug. 19 meeting then at the Sept. 30 gathering, they said.

"I don't think they need to tighten policy, but I think they probably will tighten one more time this year," said economist Bruce Steinberg of Merrill Lynch in New York. "We have such a low unemployment rate that ... the Fed may feel obligated to tighten the screw another notch."


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