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Fed Leaves Interest Rates Alone Policy-Makers Content To Wait And See What Impact Asian Crisis Has

Associated Press

Federal Reserve policy-makers once again left short-term interest rates untouched, despite data suggesting the economy is growing at a rate that in the past would have signaled a buildup of inflation pressures.

The central bank’s monetary policy panel, the Federal Open Market Committee, concluded a four-hour, closed-door meeting Tuesday by leaving the benchmark rate on overnight loans between banks at 5.5 percent.

It has been at that level since March 1997, when policy-makers nudged it a quarter percentage point higher, expressing concern that the strong economic demand at the time would result in increased inflation.

The decision Tuesday was widely anticipated, and financial markets showed little reaction.

Economic growth today is almost as strong as it was at the time of the Fed’s last interest-rate increase. What’s different is the specter of the Asian financial crisis.

The Fed and private economists expected the problems in Asia to appreciably slow U.S. growth by reducing American manufacturers’ exports to the region and by displacing U.S. domestic goods with cheaper imports.

But, so far at least, Asia seems to have helped the U.S. economy more than it has hurt it. A drop in long-term interest rates associated with Asia’s slump has stimulated home sales and construction in the United States and put cash in consumers’ pockets through mortgage refinancings.

The upshot is first-quarter economic growth expected to be close to 3.7 percent.

If not for Asia, such strength probably would have prompted the Federal Reserve to increase short-term interest rates by half a percentage point already, said economist Martin Regalia of the U.S. Chamber of Commerce.

Indeed, if they don’t get evidence of moderation by their next meeting on May 19, Fed policy-makers may raise rates.

“If the first quarter is reasonably strong, and they don’t see a marked slowdown in April, at that point they will seriously consider moving,” Regalia said.