Economy Slows Slightly, Federal Reserve Reports : Central Bank Unlikely to Raise Interest Rates for Now, Analysts Say

The Federal Reserve Board, assuaging financial markets’ fears that it was on the brink of tightening credit to cool an overheating economy, reported Wednesday that the economy is actually slowing in many parts of the country and that prices and wages are rising less rapidly than recent economic statistics have indicated.

The report, a periodic roundup of information collected by the Fed’s 12 member banks, helped spur a rally on Wall Street. Interest rates declined across the board, bond prices soared and the Dow Jones industrial average rose 12.98 points, after a 20.09-point gain Tuesday.

The report was prepared for the central bank’s Open Market Committee meeting Dec. 13-14 to set monetary policy. It was based on data gathered before Nov. 18.

Another federal report issued Wednesday showed personal income growing strongly in October, and there was speculation that the research on which it was based was not available in time for the report by the Federal Reserve.

Price Increases Ease

Analysts said the Fed’s report suggests that the central bank may not feel sufficient pressure yet to push up interest rates to curb climbing inflation. Recent price reports had ignited market fears of an imminent Fed move to raise the discount rate after Monday’s 0.5-point increase in the prime bank rate to 10.5%.

“Most districts report continued economic growth, but at an apparently slower pace than in previous months,” the Fed analysis said, adding that the Dallas, St. Louis and Kansas City districts reported sluggish conditions.

“Despite general tightness in many district labor markets and reports of shortages of skilled workers, only moderate wage increases have been observed,” it said. “Prices continue to increase in many sectors but do not appear to be as large or as widespread as recorded in previous months.”

Irwin L. Kellner, chief economist at Manufacturers Hanover in New York, said the analysis bolsters hopes of a “soft landing” for the expanding economy next year.

But another seasoned New York market watcher, chief economist Allen Sinai of the Boston Co. Economic Advisers, warned that it could be “grasping at straws” to draw solid conclusions from a document whose data may not be as timely as other indicators.

The “perceptions don’t take into account seasonal factors,” Sinai said. “While interesting, they don’t necessarily translate into economic numbers that would indicate a slowdown. Virtually all the data we have for October unambiguously indicated that growth was strong.”

Manufacturing Strong

Sinai added: “It takes time for these Fed reports to be written and it may have been based in part on September data, which was soft.”

Nevertheless, the Fed report reflects a perception that last summer’s near-boom conditions--which could have provoked Fed action to tighten credit had they persisted--have eased slightly.

It presents a picture nationwide of strong manufacturing growth, especially in durable-goods industries and export industries, with only slight easing in sectors where production capacities have been strained. It suggests a slight slowdown in retail sales, and hence of domestic consumption.

A moderate recovery from the drought and only modest demand for financial credit by businesses and consumers is also seen.

“The brisk production pace continues to be supported by growing new orders,” the report said. “Wage increases are moderate, although labor markets continue to be tight. Capacity pressures, and consequently price pressures, have reportedly eased slightly in several industries.”

Regarding manufacturing in particular, the report said, “Traditional durable-goods industries show considerable strength, even more so than many high-technology industries.”

Income Report

As for retailing and consumption, “retailers report flat to moderate sales as they enter the holiday shopping season. . . . Inventories generally remain light, as retailers anticipated the recent sluggishness in sales and continue to be cautious in stocking shelves for the winter months.”

The Commerce Department’s separate report on personal income Wednesday said personal income continued to grow in October by $72.1 billion to a seasonally adjusted annual rate of $4.18 trillion. This is equivalent to a strong 1.8% increase over September, the largest monthly income increase since October a year ago.

As much as half of the increase was attributed to large farm subsidy payments and annual bonuses for auto workers, the department said. But even without those factors, the income increase nationwide for the month would have been a healthy 0.9%.