Fed Unlikely to Lower Interest Despite Slump : Monetary: There’s a growing belief in the central bank that the economy will soon recover, so any rate cuts would risk fueling inflation.
The Federal Reserve Board is unlikely to cut interest rates further in coming weeks, despite signs that the nation’s economy remains weak, Fed sources said Friday.
Top Fed officials said there is a growing belief within the central bank that the economy will begin to recover within the next few months and that the Fed should delay any further cuts in interest rates to avoid a resurgence of inflation.
The Fed’s reluctance to take more aggressive steps in the face of rising unemployment and falling industrial production could spark renewed criticism from the Bush Administration and Congress, which have been pressing for a further reduction in interest rates.
With tax and budget policy hamstrung by the bloated federal deficit, the White House and Congress have been unable to agree on any anti-inflationary economic programs of their own, and so have increasingly looked to the Fed to stimulate the economy.
Speculation that the Fed might cut interest rates further had reached a crescendo over the past two weeks after the Labor Department reported another sharp rise in the nation’s unemployment rate accompanied by a marked slowing of inflation.
The financial markets have also been gyrating from betting by investors, first that the Fed would not lower rates further and then that it would. And the central bank itself has been sending mixed signals on the issue.
The dollar surged in early foreign exchange trading Friday on reports that the Federal Reserve would not cut rates. But it faltered later, apparently in response to statements by officials of the German Bundesbank that they favor a tight monetary policy.
Bundesbank President Karl-Otto Poehl said Friday that the German central bank will maintain its strict monetary policy and high interest rates to hold inflation below 3.5% in Germany this year.
Market sentiment held that the Federal Reserve would not cut rates because figures for the U.S. trade deficit Thursday were better than had been expected.
In Washington, Fed sources stressed that their own go-slow approach has broad support within the central bank, despite reports of a recent internal rift between Fed Chairman Alan Greenspan and other senior Fed policy-makers.
As a result of that debate, Greenspan agreed that, in certain cases, he will consult more closely with the presidents of the Fed’s 12 regional banks before moving on his own to slash interest rates.
But sources indicated Friday that Greenspan agrees that interest rates should not be pushed down any further unless the economy plunges again.
Greenspan and other senior Fed officials all share the view that the Fed’s main job is to keep inflation in check, and they reject the idea that a central bank can fine-tune the rest of the economy.
“Greenspan is surrounded by people who are of the conviction that the only thing the Fed can really deal with is inflation,” one senior Fed source said. “And so there is a broad conviction that (the Fed) has to keep an eye on the long-term inflationary pressures rather than on the short-term problems of the economy.”
And, while inflation has shown signs of moderating since the end of the Persian Gulf War brought lower energy prices, Fed officials are more concerned by the long-term inflationary trends.
“It is correct to say we are cautious. We don’t want the wrong outcome on inflation,” another Fed official said. “If you agree that there is a lag of at least six months (before interest rate cuts are felt in the economy), then you have to be thinking six months down the road,” he added. “And most people believe that the recovery will be here six months from now.”
While the jobless rate has continued to rise in recent months, Fed officials point to the rapid growth in the nation’s money supply over the past few weeks as proof that the economy is rebounding.
In fact, the growth in the money supply is the overriding factor that Fed officials track to determine whether to cut interest rates.
When the growth in the money supply fell below the Fed’s target range late last year, Greenspan and the Fed moved quickly to slash interest rates.
Those aggressive moves toward easier monetary policy seemed to pay off, and the money supply began to accelerate earlier this year.
But for the past 10 weeks it has been growing more rapidly than the Fed had targeted, making the central bankers more reluctant to ease their grip on the economy yet again. In fact, Fed officials now warn that if that high rate of growth continues for another two or three months, the Fed may raise interest rates.
“It is too early to get too concerned about it (the rate of growth in the money supply) but, if it continues, it will be an issue,” one senior Fed official said.
