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Fed Likely to Postpone Rate Increases, Some Predict

From Associated Press

Policy-makers at the Federal Reserve, sifting through murky economic data, probably will not tighten credit further this week but will indicate that they stand ready to push interest rates higher if inflationary pressures do not abate soon, private economists predicted Monday.

The central bank, facing growing political pressure over fears of a possible recession, is likely to postpone further credit tightening for the time being at a meeting this week, many economists believe, although they expect that this respite will be brief.

Most analysts are forecasting that a variety of interest rates, including banks’ prime lending rate and mortgage rates, will be headed higher in the months ahead as the Fed struggles to keep inflation from getting out of control.

So far this year, inflation at the wholesale level has been racing ahead at an alarming annual rate of 12.6%, and consumer prices have been rising at a slower, but still troublesome, annual rate of 6.1%, up sharply from the 4.4% increase in consumer prices turned in during the past two years.

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Responding to the uptick in inflation, the Fed in February moved to aggressively push interest rates higher, moving various short-term rates up by about three-fourths of a percentage point.

The Federal Open Market Committee, composed of the seven members of the Fed board and five of the 12 presidents of Fed regional banks, will convene today to review interest rates and money growth policies.

One reason that many private economists are not looking for an immediate move to tighten credit is that Federal Reserve Chairman Alan Greenspan and other Fed officials signaled in comments last week that they were prepared to take a breather to see what effect their earlier tightening will have on economic growth.

The Fed hopes that by making credit more costly, it will dampen demand and thus cool off an overheated economy. Recent weakness in retail sales, factory orders and housing construction gave some indication that the Fed’s efforts are having an effect.

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However, the credit-tightening also has raised fears at the White House and in Congress that the central bank is in danger of overdoing its anti-inflation battle and could end up pushing the country into a new recession.

President Bush has said repeatedly since taking office that he does not want the Fed to focus entirely on inflation at the risk of bringing on a recession. Backing up those concerns, 70 of the 174 Republican members of the House sent a letter to Greenspan last week urging him to lower interest rates to avert a recession.

The members of Congress complained that: “While you may cure the symptom of the illness, inflation, you will cause the death of the patient.”

Private economists are split on whether the Fed’s goal of a “soft-landing” with slower, less-inflationary growth but without a recession is possible.

Some Skeptical

David Wyss, chief financial economist for Data Resources Inc., a Lexington, Mass., forecasting firm, said he believes that the Fed will be able to navigate successfully between fighting inflation and keeping alive the six-year recovery from the 1981-82 recession.

“We think the Fed’s fine-tuning will work, but the risks of a mistake are substantial,” he said.

However, Paul Getman, senior economist at the WEFA Group, another economic consulting firm, said he was looking for further rounds of Fed tightening in the months ahead which would bring on a recession.

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“Throughout history, the soft-landing hasn’t worked. It just isn’t possible to fine-tune the economy,” he said. “The unfortunate truth is that there is no better way to fight inflation than through a recession.”

David Jones, economist for Aubrey G. Lanston & Co., a government securities dealer, said he believed that another recession was looming on the horizon but not until next year as the Fed waits a couple of months before pushing interest rates higher.

“One of the desires of the Bush Administration is to put off this recession as long as possible. That is why they are subtly twisting the Fed’s arm not to tighten,” Jones said.

Jones predicted that interest rates will remain fairly stable from April through June but that the Fed will be forced by inflationary pressures to resume tightening credit in early summer.

Rapid Rise Predicted

Those moves will push fixed-rate mortgages, now at 11.22%, up to 12% by early fall, Jones said, with other rates, such as banks’ prime lending rate rising as well.

Getman forecast an even more rapid rise in interest rates, saying he looked for the prime rate, currently at 11.5%, to climb to 12% by late April.

He said the Fed also was likely to boost its discount rate over the next couple of months by one-half percentage point to 7.5%.

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The Fed last raised the discount rate in February. An increase in this rate, which is the interest the central bank charges to make loans to financial institutions, is the most dramatic signal the Fed can send of its intentions to drive interest rates higher.


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