Fed Panel Signals No Plans for Rate Hike : Policy: After 2-day meeting, government says only that there is ‘no further announcement.’ Analysts welcome the news.
The Federal Reserve’s key policy-setting panel concluded a two-day closed-door session Wednesday without signaling any immediate plans to raise interest rates again, calming jittery financial markets that feared another rate increase might be imminent.
The Fed Open Market Committee, which sets the short-term interest rates that influence economic growth and inflation, adjourned its meeting at midday, and Fed spokesmen said only that “there will be no further announcement.”
Most economists and traders, citing indications that U.S. economic growth is slowing in several key sectors, said they do not expect the Fed to raise rates a fifth time this year.
Some analysts, though, speculated that the Fed might feel compelled to act to halt the dollar’s continuing decline against the Japanese and German currencies. Higher interest on U.S. bonds and Treasury securities attract foreign investment and tend to strengthen the dollar.
The dollar fell to new postwar lows against the Japanese yen Wednesday and dropped to its lowest level of the year against the German mark. It would have taken a massive move by the Fed to slow the decline, market watchers said.
The central bank may still decide to raise rates in the next few days or weeks. However, the central bank has apparently adopted a wait-and-see attitude in anticipation of June unemployment numbers Friday and possible word of concerted international action on interest or exchange rates from the Group of Seven economic summit this weekend in Naples, Italy.
Fed officials did not want to be seen preempting the actions of government leaders at the G-7 meeting, analysts said.
Economists also suggested that the Fed will want to see whether the slowdown in automobile sales and the June dip in home-building activity are merely temporary blips in a fast-growing economy or signs of an overall economic cooling.
The Open Market Committee is composed of Federal Reserve board members in Washington and Fed regional bank presidents. The panel next meets on Aug. 16. The Fed has increased the federal funds rate--the interest banks charge one another for overnight loans--four times this year, from 3% to 4.25%.
The most recent increase, on May 17, was accompanied by an increase in the discount rate--the interest the Fed charges for direct loans to banks. That rate stands at 3.5%, up from 3%, where it had been for nearly two years.
The May discount rate increase prompted a rise to 7.25% in the prime lending rate for most big banks.
Federal Reserve Chairman Alan Greenspan in recent congressional testimony defended the increases as necessary to keep the economy from overheating and sparking a surge in inflation. And although he left open his options for further increases, Greenspan indicated at that time that the central bank was likely to allow the effects of the four increases to work through the economy before the bank would move to raise rates again.
“This is looking to me as good as I’ve seen an economy evolving in a balanced form in a very long period of time,” Greenspan told the Senate Banking, Housing and Urban Affairs Committee in late May after the last rate increases. “The economy is moving at a fairly respectable pace . . . (and) could go on for quite a long period of time, provided that inflationary imbalances don’t emerge.”
Analysts welcomed the news of Wednesday’s inaction, saying that inflation remains under control and that higher interest rates would only punish businesses and consumers while doing little to bolster the dollar or stabilize economic growth.
“I’m happy to hear that they broke up and announced nothing,” said Martin A. Regalia, chief economist at the U.S. Chamber of Commerce. “The only (announcement) that could have come out of that meeting would be either moderately bad or very bad news. We have dodged the first bullet in the six-shooter.”
