Wednesday, August 23, 2000
Fed eschews interest rate hike for now
Analysts: Door ajar for increase in '01
By John J. Byczkowski
The Cincinnati Enquirer
As expected, the Federal Reserve Board left interest rates alone Tuesday, but its statement that it was still poised to fight inflation with future rate hikes wasn't entirely convincing.
What the Fed said Tuesday means“inflation concerns have not gone away, and the Fed is not finished raising interest rates,” said Sung Won Sohn, senior economist at Wells Fargo & Co.
But “reading between the lines, the next politically correct time to raise rates is (at the Fed meeting on) Jan. 31, 2001. As far as the market is concerned, that's forever.”
In keeping the target federal funds rate at 6.5 percent, the Federal Open Market Committee, which sets monetary policy for the Fed, acknowledged in a news release that slower growth in consumer spending is leading the economy toward more moderate, sustainable growth. Rapid increases in productivity are also helping the economy grow while allowing businesses to hold down costs and prices.
“There might be more than one FOMC member that perhaps wanted to go to that neutral assessment of risk” — an admission that the Fed wouldn't raise rates anytime soon, said Kenneth Mayland of ClearView Economics in Cleveland. The wording of the news release “is a concession to that.”
The Fed added that consumer spending remains strong and labor markets are tight, setting up a scenario that might ignite inflation — an indication the Fed is biased toward raising interest rates in the near future.
Economist Gregory Hess of Oberlin College said the Fed “is kind of stuck in the middle.” Having pushed through six rate hikes in the past 15 months, the Fed has pointed itself at an inflation target. The Fed has to stay on that course for a while, or the market won't believe the Fed's statements.
Mr. Mayland thinks the next move on interest rates might well be down. The Fed raised rates a half percentage point in May, and the effect of that might not be seen until early next year.
Because of the presidential election, the Fed is unlikely to change rates at its Oct. 3 or Nov. 15 meetings, Mr. Sohn said. A move is also unlikely at the Dec. 19 meeting, coming so close to a change in administrations.
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