Tuesday, November 16, 1999
Crystal ball cloudy on interest rates
Economists split as Fed meets today
BY JOHN J. BYCZKOWSKI
The Cincinnati Enquirer
The Fed will. The Fed won't. The Fed must. Federal Reserve Board governors will meet this morning in Washington, and it's a toss-up whether the nation will have higher interest rates this afternoon.
A boost in rates could raise the cost of many forms of credit — from mortgage rates and credit card rates to business loans — and slow the economy.
|
TODAY'S UPDATES
|
|
Latest news from Associated Press
|
|
POSSIBLE EFFECTS
|
• If the Fed raises interest rates, “the prime rate will go up almost automatically,” taking with it rates on home equity loans, car loans and credit cards, said Sung Won Sohn, economist at Wells Fargo & Co.
• Leaving rates where they are means that the Fed probably wouldn't act until a Feb. 1 meeting. Analysts think it's unlikely the Fed would raise rates at its Dec. 21 meeting, as Y2K concerns heighten.
|
Some economists think that's exactly what the nation needs right now, but there are plenty who think the opposite. And there's a third school of thought — that the Fed will raise rates today because, from a tactical standpoint, it's the best time for it.
The brokerage firm Goldman Sachs says a quarter-point rise in the federal funds rate, to 5.5 percent, is imminent. The economy continues to grow rapidly, and labor markets are tight, with October unemployment at 4.1 percent, the lowest since the current economic expansion began in March 1991. That sets the stage for a rise in wages that could trigger inflation next year, the firm said.
On the other hand, there's little inflation in sight. “I think there's overwhelming reason to believe (the Fed) will not move rates” today, said James Coons, chief economist for Huntington Banks in Columbus. Measures of employment costs show little inflation pressure, and good growth in productivity indicates that the economy can expand without inflation. In addition, the economy is already showing signs of slowing, reflected in slower home sales and consumer spending.
Fed Chairman Alan Greenspan “puts a lot of emphasis on the unit labor cost data,” Mr. Coons said. “I think he's had a predisposition against moving (on interest rates). That's a big part of the equation right there.”
There's a tactical case for raising interest rates now: The Fed lowered rates three times in the fall of 1998, easing credit in response to financial crises overseas. Those crises are over, and Fed officials have since said they want to return to their previous policy path. The Fed raised rates twice this year — quarter-point moves June 30 and Aug. 24 — so there's a third move yet to be made.
The Fed is unlikely to change rates at its Dec. 21 meeting, on the eve of Y2K. Does the Fed want to leave investors and consumers waiting until its first meeting of 2000, Feb. 1, for the next change?
Probably not, said Gregory Hess, an economist at Oberlin College and member of the Shadow Open Market Committee, a 20-year-old group of economists who comment on Fed policy. “This is the time to do it,” he said. “They're playing it in a very tactical way right now. They're going to make that third move and leave (policy) in a neutral spot” heading into 2000.
Kroll-O'Gara Co. agrees to buyout
Crystal ball cloudy on interest rates
Greenspan: Cooperation key in new marketplace
Pella to acquire Pease Industries
Cincinnati Bell begets BroadWing
Miniatures of Peace Bell are appealing
TRISTATE BUSINESS SUMMARY
INDUSTRY NOTES: BANKING
PEOPLE ON THE MOVE
Hewlett-Packard vision: Nothin' but Net
TRISTATE MARKET SPOTLIGHT
