Saturday, December 18, 1999
Fed likely to hold rates
Some analysts see rise soon
Enquirer wire services
WASHINGTON — The Federal Reserve is widely expected to leave interest rates unchanged next week, with the year 2000 changeover looming just a few weeks away.
But some economists see a good chance the Fed will revert to a tightening bias at Tuesday's meeting and say a February rate hike is becoming more likely because the roaring U.S. economy shows few signs of cooling down.
“The tone of the discussion will be when and how much to raise interest rates. There will be strong sentiment to raise rates once we get by the change of century date and find there's been no adverse consequences,” said Michael Moran, chief economist with Daiwa Securities.
While overall inflation remains under wraps and productivity continues to accelerate, economists say this is little solace to the Fed at a time when retail sales and trade data show the economy running full steam ahead and the falling unemployment rate reflects an ever-tightening labor market.
“The critical objective of the Fed has been to slow the economy's growth to a sustainable pace,” said Charles Lieberman, chief economist with First Institutional Securities. “We've been very fortunate that inflation has not ticked up ... but there's a need for a more moderate pace of growth sooner rather than later, and that need is most clearly reflected in the tightness of the labor market.”
Mr. Lieberman doesn't see the Fed altering rates this month, but said a shift back to a tightening bias is possible.
Analysts say the fact that overall inflation has not risen markedly amid increasing tightness in labor markets and red-hot U.S. demand means there is no urgency for the Fed to nudge rates higher next week.
But they note that Fed offi cials are becoming more worried that the economy risks overheating given that the unemployment rate, now at a 29-year low of 4.1%, has kept falling as the U.S. economy barreled along at a brisk 5.5% pace in the third quarter.
Boston Federal Reserve Bank President Cathy Minehan recently said the tight labor market signals that the current pace of U.S. economic growth may be unsustainable. She also said inflation risks are on the rise in the current economic environment and emphasized the Fed must be vigilant to ensure the economy doesn't overheat.
Other Fed officials also have sounded a note of caution that the economy's breakneck pace may ultimately trigger higher inflation.
Fed governor Edward Kelley said earlier this month that the U.S. economy needs to slow as continued fast growth and ongoing labor market tightening would put “upward pressure” on costs and prices.
Fed governor Laurence Meyer also has warned that “more active participation” by the Fed may be required to bring the U.S. economy to a “more sustainable” state from its “current exceptional, but unsustainable state.”
And analysts expect this caution from Fed officials to translate into rate action early in the new year.
“It's hard to make the case from the data we're looking at that the economy is anything other than strong and continuing to grow at an above-trend pace, a pace fast enough to continue pushing down the unemployment rate,” said Dana Johnson, vice president and head of market analysis at Banc One Capital Markets.
At next week's policy meeting “the Fed will leave the markets with the view that the odds are pretty good they will tighten in the first quarter and maybe even in February,” said Mr. Johnson, who sees a good chance the Fed will shift back to a tightening bias next week.
Consumer demand remains on fire. Retail sales in November surged 0.9 percent, nearly double what financial markets were expecting.
U.S. imports in October shot up 1.6 percent to a record high, reflecting strong consumer demand.
Fed governor Lyle Gramley predicted the Fed will leave interest rates steady at Tuesday's meeting and will likely keep a “neutral” policy bias. With the possibility of Y2K-related cash shortages developing around the end of the year, “it would not be the wisest course of action” for the Fed to hang the threat of higher interest rates over the financial markets, he said.
“The threat of inflation is not so immediate” that the Fed needs to act now, he said.
Mr. Gramley expects the Fed to raise rates “by the latest” at its March 21 meeting and said the Fed may not be sure at its Feb. 1-2 meeting that Y2K-related economic and financial problems are over.
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