Stability in Monetary Policy Is Expected Through Rest of the Year
Federal Reserve Board policy-makers, who meet today, are not likely to change short-term interest rates for months, extending a yearlong period of monetary-policy stability into 1994, many economists believe.
If the central bank’s policy plays out in coming months as analysts expect, it would be the longest period of rate stability since the mid-1960s.
The benchmark federal funds rate--the rate charged among banks on overnight loans--has remained at a 30-year low of 3% since Sept. 4, 1992. It influences a wide variety of rates, from those charged on adjustable-rate mortgages to those paid on bank deposits.
The stability has been possible, economists said, because inflation has remained too tame to justify a rate increase and economic growth--although far from spectacular--has been just strong enough to prevent a rate decline.
“The Fed is probably reasonably pleased with the economy the way it is,” said economist David Berson of the Federal National Mortgage Assn. “We’ve got the lowest interest rates . . . and the lowest inflation since the 1960s. Unemployment is still too high, but it’s coming down and it’s not at recession levels. And the economy is growing--not rapidly, but it’s growing.”
The Fed “beige book” report on regional economic conditions, prepared for today’s meeting of the policy-setting Federal Open Market Committee, found “slow to moderate growth” in most parts of the country and “little evidence of inflationary cost pressures.”
Because analysts foresee little fundamental change in economic conditions, they do not expect any change in Fed policy before next year. Eventually, economic growth and demand should reach a level that will start to put a bit more upward pressure on prices. When that happens, the Fed will begin to nudge short-term rates higher in a move to curb demand, economists said.
“Sometime in 1994, they’ll begin a very gradual tightening process. Exactly when that may happen, I don’t know . . . but there’s nothing to motivate the Fed to act in the near future,” said economist Bruce Steinberg of Merrill Lynch.
A survey of 228 economists issued by the National Assn. of Business Economists on Monday found 66% predicting no change in Fed policy within the next six months. Twenty-three percent believe the Fed will increase rates, while 11% expect a cut.
The open market committee, which meets behind closed doors eight times a year, is made up of the seven-member Federal Reserve Board and the presidents of the Fed’s 12 regional banks. Each of the seven board members has a vote, as does the president of the New York regional bank. The remaining 11 presidents rotate four votes among themselves.
The committee last met Aug. 17. The results of that meeting will not be known until Friday, with the release of the minutes. At the last meeting in which the committee’s action is known, July 6-7, it voted to maintain a bias in its policy in favor of raising rates, but it has not yet found a reason to act on that bias.
“I think it’s going to take a couple of bad inflation reports” to prompt Fed tightening, “and I don’t see a major reason for that to happen anytime soon,” Steinberg said.
Economists said the decline of nearly two percentage points over the last year in long-term interest rates--which are less influenced by Fed policy than are short-term rates--is a sign that financial markets also do not foresee any acceleration of inflation.
