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Big Increase In Industrial Output Not Seen As Reason To Hike Rates

Tue., Dec. 17, 1996

Output at the nation’s factories, mines and utilities shot up at the fastest pace in nine months, but since most of the strength came from special factors, the gain was not viewed as an alarming sign of inflationary pressures.

The 0.9 percent increase in industrial output was twice what economists had been forecasting, but they insisted that the advance should not prove worrisome to Federal Reserve policy-makers who meet behind closed doors today for their final interest-rate meeting of the year.

More than half the November gain in factory output was attributed to a rebound in auto production, which had been depressed in October when strikes at General Motors plants in Canada shut down American assembly lines.

About 0.2 percentage point of November’s gain was attributed to increased demands on utility companies because of colder-than-normal weather.

The Federal Open Market Committee, composed of the seven Fed board members and five of the 12 regional bank presidents, will ignore those special factors, analysts said.

“The Fed meeting will be a non-event. They will stand pat,” said Sung Won Sohn, chief economist at Norwest Corp. of Minneapolis. “We still have very moderate economic growth and low inflation. The Fed has time to wait and see how things develop.”

The central bank last changed interest rates on Jan. 31 when it reduced its target for the federal funds rate, the interest that banks charge each other, by a quarter-point down to 5.25 percent to spur an economy that looked at the time as though it could be headed into a recession.

However, when economic growth surged in the spring, expectations switched from rate cuts to possible interest rate increases. But so far the central bank has been content to watch and wait, believing that the economy would slow enough in the second half of the year to keep inflation at bay.

Indications of an economic slowdown and relief over the Fed’s decisions not to raise rates have been a key factor in pushing long-term interest rates, set by financial markets, lower. The drop in bond yields has provided much of the momentum for the surging stock market, which shot up to record highs in the month following the presidential election.

That investor euphoria was called into question 11 days ago when Federal Reserve Chairman Alan Greenspan expressed concerns about “irrational expectations” in financial markets.

Private economists said they believed Greenspan’s remarks, which sent shock waves in stock markets from Tokyo to London, was a bit of jawboning in an attempt to talk stock prices down without having to resort to actual rate increases.

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