Federal Reserve Expected To Leave Interest Rates Alone Statistics Make It A Close Call, But Political Considerations May Decide The Issue

Political considerations may make it easier for Federal Reserve policymakers to leave interest rates unchanged when they meet today, even though the economics alone make it a close call.

“The Fed doesn’t want to be seen as anti-business and shutting down the economy if they don’t have to,” said Gary Thayer, a senior economist at A.G. Edwards & Sons Inc. in St. Louis.

Republicans, Democrats, business groups and labor organizations criticized the Fed after it voted March 25 to raise the overnight bank lending rate a quarter point to 5.50 percent, and they say there’s even a less obvious need for another increase now.

Since the March interest rate increase, intended to cool “persisting strength in demand,” government reports showed that retail sales fell, manufacturing slowed and inflation remains tame. “The slowdown gives them coverage” to hold rates steady for now, said James Annable, chief economist at First Chicago NBD.

At the same time, signs that the economy is ratcheting down aren’t entirely convincing. The unemployment rate fell last month to a generation low, for example, and stock market indices set new records last week.

“What really bothers me, and what I think bothers the Fed, is the very, very low unemployment rate,” said Eileen Neely, manager of economic forecasting at Fannie Mae. “As long as there’s momentum in the economy, why take the chance of allowing wage pressures to build and therefore inflation?”

The unemployment rate fell to 4.9 percent in April from 5.2 percent a month earlier. Falling unemployment is a concern for inflation watchers at the Fed because it may mean the economy is creating so many jobs that employers will need to jack up wages to attract the workers they need.

Given that backdrop, it should come as no surprise that economists are closely divided over what the Fed will do. Indeed, 20 of the 39 primary dealers - the only firms that deal directly with the Fed’s securities trading desk - don’t expect U.S. central bankers to raise the overnight bank rate again at that meeting, according to a Bloomberg News survey. The rest expect an increase.

Many investors, meanwhile, are betting a rate increase isn’t in the offing. The yield on three-month U.S. Treasury bills, now at 5.24 percent, is 19 basis points lower than where it was after the March 25 rate increase. And the yield on the June federal funds futures contract is down 3 basis points over the same period to 5.61 percent, just 11 basis points above the target.

Longer-term yields are also lower since March, suggesting inflation has lessened as a concern for investors. The U.S. Treasury’s 30-year bond fell 1/8 today, pushing up the yield about 1 basis point to 6.92 percent, down from 7.17 percent in mid-April. Stocks rose, with the Dow Jones Industrial Average up 34 points to close at 7228.88.

Criticism of the Fed is nothing new, of course, though near unanimity like that heard these days is rare.

“America needs lower interest rates, a higher rate of economic growth and a bigger piece of the pie for working families,” said Sen. Tom Harkin, an Iowa Democrat. “A rate hike is nothing more than a tax increase on the American economy and the American people.”

Similarly, Tupperware Corp. Chairman and Chief Executive Warren L. Batts, who also heads the National Association of Manufacturers, counseled against an interest rate increase. “They should sit tight and wait for some more signs of inflation before they move,” Batts said.