Fed Isn’t Expected To Raise Rates
Conflicting reports on the economy Monday are causing many analysts to believe Federal Reserve policy makers will keep short-term interest rates unchanged this week.
“This is more argument to wait for more evidence,” said Robert G. Dederick, economic consultant for Northern Trust Co. in Chicago. “The evidence to date is not the sort to send out fire engines.”
Until recently, many analysts believed the Federal Open Market Committee would raise rates at its two-day meeting beginning Tuesday to keep the economy from overheating and causing inflation to boil over.
However, recent economic reports have been mixed, leading analysts to suggest the committee would not act until later this year when more information is available.
“It’s my belief they will have a vigorous debate, but won’t change policy,” economist Richard Berner of Mellon Bank in Pittsburgh said. “I do think that at some point, and not too far off, they will have to change policy.”
Stephen S. Roach, an economist at Morgan Stanley & Co. in New York, agreed. “I think they should tighten rates, but I don’t think they will,” he said.
Amid the uncertainty, investors remained cautious, although stock prices rose.
The FOMC cut the federal funds rate to 5.25 percent from 6 percent in three steps ending Jan. 31 of this year when the economy appeared to be stalling. The funds rate is what banks charge each other for overnight loans.
When it meets Tuesday, the FOMC will be at full strength for the first time in months. Former White House budget director Alice Rivlin was sworn in as vice chairman last week and St. Louis economist Laurence H. Meyer took office as a Fed governor.
At their confirmation hearings, both voiced support of the anti-inflation policies of Alan Greenspan, who began a third term as chairman last week. Thus, analysts expect little change in monetary policy.
The FOMC is composed of the seven Fed governors and five of the 12 presidents of the regional Fed banks. It meets privately eight times a year.
On the eve of the meeting, the National Association of Purchasing Management released a survey showing strength in what has been a sluggish manufacturing sector.
The association’s index of manufacturing activity rose to 54.3 percent last month from 49.3 percent in May, highest since an identical 54.3 percent in February 1995.
A reading above 50 percent indicates growth in manufacturing. Readings above 44.5 percent over time suggest growth in the economy as a whole.
At the same time, the Commerce Department said consumer spending rose 0.8 percent in May, the biggest advance in three months. Spending totaled $5.15 trillion at a seasonally adjusted annual rate, up from a revised $5.11 trillion in April.
The increase was the largest since a 1.1 percent gain in February. And April’s 0.5 percent advance was even stronger than the 0.1 percent initial estimate. Consumer spending represents two-thirds of the nation’s economic activity.
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