Conflicting Signals Convince Fed To Stay On Sidelines Central Bank Decides Not To Tamper With Interest Rates For Now

Confronted by confusing economic crosscurrents and a budget stalemate, the Federal Reserve passed up a chance Wednesday to cut interest rates.

The central bank’s policy-setting Federal Open Market Committee met for 4-1/2 hours behind closed doors before issuing a brief announcement that signaled it had left rates unchanged.

Financial markets took the announcement in stride. It had been widely expected that the Fed would stay on the sidelines given all the uncertainty created by the budget struggle and conflicting signals on the economy.

The Dow Jones industrial average jumped 50.94 to close at 4,922.75, its fifth record high in the last six trading sessions. Nearly all of the gain came in the last two hours of trading, after the Fed announcement.

Shortly before the Fed began its deliberations, the government reported that output at factories, mines and utilities fell by 0.3 percent in October, the first decline in six months.

While weakness in the manufacturing sector could have given the central bank a reason to cut rates, a second report showed a worse-than-expected reading on inflation with consumer prices rising by 0.3 percent last month, the biggest spurt since May.

Analysts said the central bank did not want to change policy given those economic cross currents and the uncertainty over how the budget battle will be resolved. Some suggested the central bank will pass up the chance to cut rates at its last meeting of the year on Dec. 19 given the likelihood that a budget plan will still not have been approved.

“A budget deal is a prerequisite before the Fed will do anything,” said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis. “They want to stay cool, quiet and calm.”

After engineering seven straight rate increases to slow the economy, the Fed abruptly switched course in July and reduced its federal funds rate, the interest that banks charge each other, by a quarter point.

But that has been the only rate relief provided. The Fed passed up chances at FOMC meetings in August, September and now November to reduce rates further.

Despite weakness in manufacturing and consumer spending evidenced in October, analysts said the central bank may well sit on the sidelines until 1996.

“Unless the economy does as badly in November and December as it did in October, we have closed the book on any further Fed easing for this year,” said Allen Sinai, chief global economist at Lehman Brothers in New York. “The budget impasse in Washington gives the Fed every reason to wait.”

The 0.3 percent drop in industrial production was the first setback in manufacturing since a 0.6 percent plunge in April. However, much of the October weakness reflected a strike at Boeing aircraft. Production would have been down only 0.1 percent without the effects of that strike.

Still, Fed critics said the weakness in manufacturing and consumer spending argued that the economy was threatening to falter again after a rebound in the summer.

“We haven’t even recovered from the last recession and now the national economy is weakening again,” said Rep. Pete Stark, D-Calif. “We need the boost of an interest rate cut in time to rejuvenate sales for the holiday season.”

Jerry Jasinowski, president of the National Association of Manufacturers, called recent economic statistics “rather bleak” and said the Fed must cut rates further.

Many private economists dismissed the 0.3 percent rise in consumer prices in October as a temporary spike after four months in which retail prices were rising only 0.1 percent or 0.2 percent per month.