Federal Reserve Leaves Interest Rates Unchanged

By Vincent Del Giudice Bloomberg News | THE JOURNAL RECORD, October 1, 1997 | Go to article overview

Federal Reserve Leaves Interest Rates Unchanged


Vincent Del Giudice Bloomberg News, THE JOURNAL RECORD


WASHINGTON -- Federal Reserve policymakers Tuesday left unchanged the overnight bank lending rate at 5.5 percent, content with the U.S. 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 growth.

Given that, Greenspan has shown a willingness to experiment to see 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 in September. "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 Dec.16. 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 dwellings 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, Joseph Coyne. "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 Nov. …

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