Fed Should Be Content To Leave Rates Alone Analysts Say Economic Slowdown And Inflation Figures Should Make Regulators Happy
With the economy slowing and inflation in check, analysts say the Federal Reserve likely will pat itself on the back and leave interest rates unchanged this week.
Commentators are practically unanimous in predicting central bank policymakers will stay on the sidelines when they meet today. But there is sharp disagreement on the future, with prognostications ranging from recession to resurgence before next year’s elections.
“It may be an extremely short meeting” when the Federal Open Market Committee assesses the economy, said David Jones of Aubrey G. Lanston & Co. The Fed “has done an extremely good job bringing the economy in for a soft landing much sooner than I expected.”
The economy expanded at a rapid 5.1 percent annual rate in the last three months of 1994 but slowed to a moderate 2.8 percent pace in the first quarter this year as a series of seven Fed interestrate increases took hold.
The central bank doubled the federal-funds rate that banks charge each other for overnight loans from 3 percent in February 1994 to 6 percent a year later - and the prime rate rose accordingly to 9 percent. Since Feb. 1, the Fed has left the funds rate unchanged with evidence of an economic slowdown.
The dramatic deceleration has prompted some analysts to predict an interest rate cut, and that has contributed to a remarkable rally in financial markets that has sent stock and bond prices soaring. The Dow Jones industrial average climbed more than 700 points since Thanksgiving before a wave of nervousness and profit-taking prompted a retreat last week.
The rally continued Monday. By mid-afternoon, the Dow was up 54 points.
While knowledgeable observers are confident the Fed will hold the line on interest rates this week, they say the future is uncertain.
Inflation, though still moderate, has picked up and is causing some worries. Consumer prices rose more sharply in April than they had in eight months, pushing the annual rate for the year up to 3.6 percent.
Former Federal Reserve Board member Wayne Angell said the central bank must remain vigilant since there are good prospects the economy will accelerate later this year.
Consumers are taking a break and piling up savings for a few months, said Angell, chief economist with Bear, Stearns & Co.
“Then we’re off to the races again,” he said, predicting the Fed will be convinced by the fall it “has more work to do” to rein in growth.
The Federal Open Market Committee has 12 members: the seven Fed governors in Washington and five of the 12 regional bank presidents. They meet in private eight times a year.
The outlook for the rest of the year and next depends heavily on consumer confidence and spending, which accounts for two-thirds of the nation’s economic activity.
The mortgage refinancing boom is over. And the housing market is tepid, even though rates have come down and, historically, are at appealing levels. Thirty-year, fixed-rate mortgages averaged 7.83 percent last week, below their recent peak but still far from their 25-year low of 6.74 percent in the fall of 1993.