Economy’s Moderate Pace Gets Nod From Fed : Analysts See Report as Sign That Interest Rates Are Likely to Remain Steady

economy “grew at a moderate, sustainable pace” in the past three months, the Federal Reserve said Wednesday in a report that analysts took as a sign that the central bank will not be pushing interest rates higher.

The Fed’s review of economic conditions around the country painted a picture of an economy in which the growth rate is slowing and inflationary pressures easing.

The central bank for the past year has been trying to engineer just such a development, by pushing interest rates up to dampen demand and thus relieve pressures on tight labor markets and factories operating at peak capacity.

The tone of this report was more optimistic than the last economic survey released two months ago, when the Fed expressed fears about pressures on wages and prices as a result of the pace of economic growth.

The new report, based on surveys conducted by the 12 regional Federal Reserve banks, said there were no serious bottlenecks in the manufacturing sector and the costs of raw materials and labor had shown no significant increases.

The Labor Department reported that business productivity rose at an annual rate of 0.5% in the first quarter of 1989, with manufacturing workers significantly increasing their per-hour output.

“The nation’s economy grew at a moderate, sustainable pace in February, March and early April,” the Fed said in its report.

By using the word “sustainable,” analysts said the Fed was expressing its satisfaction with the current pace of economic growth and indicating that it did not see the need to push interest rates higher.

“This is a very optimistic review,” said David Wyss, an economist with DRI-McGraw-Hill, an economic consulting firm. “It says that the Fed is happy with the way the economy has moderated with growth slowing to a sustainable level.”

The economic survey will be used when Fed policy-makers meet May 16 to decide on the course for future monetary strategy. The Fed’s main job is to keep inflation under control through decisions on how much money to make available to the banking system.

The Fed has been in a holding pattern in recent months after a period of aggressively pushing interest rates higher in late December and January. Analysts said they believe that interest rates will stay where they are for the next couple of months as the Fed assesses the impact of its earlier actions.

But Wyss said he expected rates to start falling by early summer as the slowdown in the economy becomes more pronounced.

While some economists have expressed fears that the Fed has overdone its tightening efforts and will push the country into a recession later this year, the economic review saw no evidence of a dangerous slowdown in any sector of the economy.

The Labor Department’s productivity report said overall output in non-farm business rose at a rate of 3.6% in the first quarter while hours worked climbed 3.1%, leaving the half-percentage point productivity gain, the government said. The department revised the fourth-quarter non-farm productivity gain to an annual rate of 1%, up from the 0.1% initially reported.

All of the figures were seasonally adjusted.

The gains were marked in manufacturing: Productivity improved at a 3.8% annual rate in the first quarter from the final three months of 1988 because manufacturing workers increased their output at a 4.6% rate while the number of hours worked grew at only a 0.8% rate.

The data essentially confirmed figures in the government’s recent reports on the gross national product and employment costs.

Productivity--output per hour for all workers--is an indicator of the efficiency of American business. Because of labor shortages, particularly in skilled jobs, economists have been predicting that wages will rise faster and significant productivity gains will be needed to curb inflation.

Still, there were signs in Wednesday’s report that wage gains are not outpacing inflation in general.

The Labor Department reported that hourly compensation in non-farm business rose at a 5.7% annual rate in the first quarter but real hourly compensation, which takes into account the increase in consumer prices in that period, grew at only a 0.3% rate.

For all of 1988, hourly compensation adjusted to factor in consumer inflation rose a revised 0.4%, the department said.

In manufacturing, real hourly compensation lagged 0.6% behind inflation in 1988 and at a 1.2% rate behind in the first quarter, compared to the fourth quarter of 1988, according to the government data.