WASHINGTON -- Federal Reserve policymakers Tuesday left unchanged
the overnight bank lending rate at 5.5 percent, content with the
economy's ability to grow without sending prices higher.
"Inflation is a non-event," said Anthony Chan, chief economist at
Banc One Investment Advisors in Columbus, Ohio, noting Fed Chairman
Alan Greenspan has made it clear in speeches and congressional
testimony this year that the central bank's enemy is inflation, not
Given that, Greenspan has shown a willingness to experiment to
how fast the economy can expand beyond the Fed's oft-stated non-
inflationary target of 2.5 percent before the Fed needs to step on
the brakes. During the first six months of the year, the economy
expanded at a 4.1 percent annual rate.
Economic statistics published Tuesday point to additional growth,
with little danger the economy will overheat. The Conference Board
reported consumer confidence in the economy improved in September
from August, while a Commerce Department report showed sales of new
single-family homes declined in August. Additionally, a regional
report suggested manufacturing activity cooled in the Chicago region
"I think the Fed is very pleased and also very puzzled that
inflation hasn't shown up," said Russell Sheldon, an economist at
Mellon Bank in Pittsburgh. Still, they aren't about to let their
guard down. "Once they begin to see it they'll act," he said.
However, investors looked beyond Tuesday's Fed meeting and pushed
bond prices lower, concerned central bankers may opt to raise the
overnight bank rate at their next policy meetings, Nov. 12 or
The danger is low unemployment and strains on industrial capacity
could translate into higher labor and production costs -- and
ultimately consumer prices. Tim O'Neill, chief economist at Harris
Bank/Bank or Montreal, forecasts a 25-basis point increase in
November and a similar hike early in 1998.
With consumer prices rising at only a 1.6 percent annual pace
during the first eight months of the year -- the slowest pace in 11
years -- Greenspan's logic dictates that the Fed doesn't need to
raise borrowing costs for the time being.
Still, since the Fed last boosted the overnight bank lending rate
by a quarter point in March, U.S. unemployment has fallen below 5
percent, near a generation low. Factories are churning out goods.
Consumers are buying houses, with sales of previously owned
hitting a record level in August.
Growth in the third quarter, which ended Tuesday, probably reached
3 percent, said Joel Kent, an economist at Lehman Brothers in New
York. In the fourth quarter, growth will likely range between 3
percent and 3.5 percent, said William Sullivan, an economist at Dean
Witter Securities in New York.
The absence of inflation in this hothouse growth environment has
the makings of an Agatha Christie mystery. For Greenspan, though,
there's no riddle at all. He reasons that advances in technology are
allowing service and manufacturing companies alike to boost
productivity and profits without raising prices.
News of Tuesday's decision by the Fed's policy-setting committee
came in a brief statement issued by the Fed's chief spokesman,
"The Federal Open Market Committee meeting ended at 12:45 p.m.
There is no further announcement," Coyne said.
In addition, the Fed's Board of Governors Tuesday left unchanged
at 5 percent the more symbolic discount rate for loans to banks from
the Fed's system of 12 district banks.
These salad days will eventually have to come to an end, some
analysts contend. As the economy continues to expand, higher labor
costs could lead Fed policymakers to bump the overnight bank rate a
quarter point higher at either of the next two policy meetings: on