Wednesday, August 02, 2000

Is the slowdown enough?

Federal Reserve may still hike interest rates

The Associated Press and Bloomberg News

        NEW YORK — A key measure of future economic activity indicates the U.S. economy is cooling off, but it remains unclear whether the slowdown will be enough to head off another interest-rate hike by the Federal Reserve.

        The Index of Leading Economic Indicators held steady at 106 in June, forecasting a break from rapid economic growth for the rest of 2000. The results met economists' expectations.

        The index, which attempts to forecast economic trends for the next three to six months, dropped 0.1 percent in May after holding steady in April.

        Observers differ over how the Fed, which has raised interest rates six times since last summer, will interpret the recent data.

        “The question is how much is the economy slowing and is it slowing enough so that the Fed doesn't have to raise interest rates again?” said Ken Goldstein, an economist for the business-financed Conference Board. “My vote is no hike in August. But that's just a guess.”

        Paul Ferley, assistant chief economist at Harris Bank/Bank of Montreal in Toronto, disagreed.

        “Our view is that the Fed will have to raise rates in August, and probably in November and December,” said Mr. Ferley. The numbers suggest that without more tightening, the economy will bounce back, erasing the cooldown's effects, he said.

        In a separate report Wednesday, the Commerce Department said sales of new homes fell 3.7 percent in June to the slowest sales pace in more than two years, hurt by rising mortgage rates. (Home sales also slowed in the Tristate in June.)

        “Higher interest rates are really beginning to have an impact,” said Joel Rassman, chief financial officer at Toll Brothers Inc., a large luxury home builder based in Huntingdon Valley, Pa.

        St. Louis Fed President William Poole said the economy is benefiting from “low and stable inflation,” giving the Fed room to experiment with faster growth than previously though possible.

        The Federal Reserve is scheduled to consider raising interest rates again when it meets Aug. 22. The central bank left rates unchanged at its most recent meeting in June but left the door open to another rate increase this month.


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