Newspaper article THE JOURNAL RECORD

How Long Can Stable Growth Hold off Change in Interest Rates?

Newspaper article THE JOURNAL RECORD

How Long Can Stable Growth Hold off Change in Interest Rates?

Article excerpt

WASHINGTON -- The economy seems to be settling into a more stable growth pattern. Most economists believe that will keep the Federal Reserve from raising interest rates right now. But how much longer?

The answer may depend on the groundwork laid in debate during central bank policy-makers' closed-door meeting today.

As they look over the economy, Fed officials have got to be pretty pleased with what they see: plenty of growth and not much inflation. "You have to go back to the early 1960s to see anything remotely similar," said economist David Jones of Aubrey G. Lanston & Co. in New York. "`So far, so good,' is the Fed's view." The economy grew very strongly in the first half of the year, at an annual rate of 4.1 percent, pushing the nation's unemployment rate below 5 percent for the first time since 1973. In the past, that's been a harbinger of higher inflation, which can frazzle financial markets and short-circuit an expansion. The cure has been a preventative dose of higher interest rates aimed at moderating growth and keeping a lid on prices. Yet policy-makers have little reason to bump up short-term interest rates, because inflation this year has improved, not worsened. Consumer prices -- excluding food and energy costs, which bounce around a lot -- have risen at a scant 2.2 percent annual rate so far this year, down from 2.6 percent last year and the best since 1965. "It's been an incredible streak of luck," said economist Paul Getman of Regional Financial Associates in West Chester, Pa. "I'm shocked. But if it lasts more than another six months, I'll be doubly shocked. I really think by next spring the Fed will be back to raising rates." Jones said the move could come even sooner, at meetings scheduled for Nov. 12 or Dec. 16. Just how soon the Fed moves depends on whether economic growth moderates enough the rest of this year to ease strain on factory capacity and the labor supply. …

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