Wednesday, December 22, 1999

Rates hike expected early next year

BY CLIFF PEALE and The Associated Press
The Cincinnati Enquirer and The Associated Press

        The Federal Reserve left interest rates unchanged Tuesday, but an increase in early 2000 is likely, economists said.

        “I'm not sure it'll be in January, but it'll be soon after that,” said Gregory Hess, an economist at Oberlin College and a member of the Fed-watching Shadow Open Market Committee.

        In a statement after its meeting in Washington, the Fed expressed continued worries about inflation down the road.

        It also kept its policy directive — intended as a sign of future rate moves — at neutral, citing uncertainties about the Y2K computer date changeover.

        “At its next meeting, the committee will assess available information on the likely balance of supply and demand, conditions in financial markets and the possible need for adjustment in the stance of policy to contain inflationary pressures,” the Fed said in its statement.

        Financial markets were mixed. The Dow Jones Industrial Average closed at 11,200.54, up 56.27. The 30-year Treasury bond declined in price, however.

        By leaving rates unchanged, the federal funds rate — the interest that banks charge each other on overnight loans — continues to stand at 5.50 percent.

        Because many economists and investors have been anticipating more increases and might have built them into the stock market already, a rate increase early next year probably will not drastically affect either the market or consumer spending, local Fed watchers said.

        But several rate increases in the first half of next year could slow purchases of big-ticket items like cars and homes.

        “Eventually, it will slow down the rate of consumer spending, but no one knows what increase it will take to bring that about, particularly with the stock market performing the way it is,” David Hehman of the Federal Home Loan Bank of Cincinnati said.

        The decision was an nounced after a closed-door meeting by the Federal Open Market Committee, the group of Fed policy-makers who set interest rate policies.

        In a three-paragraph statement, the Fed said that it remained concerned that the economy is growing too rapidly and thus could spark inflationary pressures down the road.

        But the central bank said it had decided to hold rates unchanged at this meeting because it wanted to focus interest rate policies on ensuring “a smooth transition into the Year 2000.”


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