Newspaper article THE JOURNAL RECORD

Fed's Decision Not to Raise Rates May Change Due to Tight Labor

Newspaper article THE JOURNAL RECORD

Fed's Decision Not to Raise Rates May Change Due to Tight Labor

Article excerpt

WASHINGTON -- Despite the lowest unemployment level in nearly a quarter-century, the Federal Reserve decided on Tuesday there was no urgent need to boost interest rates to dampen inflationary pressures. The Fed's decision had been widely expected, given recent comments by Federal Reserve Chairman Alan Greenspan about the "exceptional" combination of low unemployment and low inflation the economy is enjoying.

The Fed decision extended this week's rebound on Wall Street. The Dow Jones industrial average closed up 114.74 points at 7,918.10 after a 108-point gain on Monday. But the market euphoria may be short-lived. Some economists suggested the Fed may start raising rates as soon as their next meeting on Sept. 30 as evidence mounts that tight labor markets are finally showing up in rising wage demands and higher inflation. Analysts said the settlement reached between United Parcel Service and its drivers after a 15-day strike could be the first sign of this rising pressures, and that it had to attract the attention of Fed policy-makers during their closed-door discussions. "We had an unusual amount of publicity that accompanied the UPS strike and it looks like the union won on almost all counts," said David Jones, chief economist at Aubrey G. Lanston & Co. in New York. "This may cause a lot of workers to decide that in this time of tight labor markets, they too deserve increased benefits and higher wages." The absence of wage pressures -- which make up two-thirds of the cost of production -- has been the key factor that has allowed the economy to grow so strongly without rising inflation. So far this year, consumer prices have been creeping up at a 1.5 percent annual rate, less than half of last year's gain. "The UPS settlement has pointed out the economy's vulnerability to wage inflation. We have a strong economy and tight labor markets," said former Commerce Under Secretary Everett Ehrlich. The Fed decision Tuesday came after 3 1/2 hours of closed door discussions by the Federal Open Market Committee, the group of Fed board members and regional bank presidents who meet eight times a year to determine interest rate policy. …

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