Federal Reserve Panel Decides to Hold the Line on Rates

Sending a signal that it believes the nation’s economy will continue to grow moderately with little threat of inflation, the Federal Reserve Board decided Tuesday to leave interest rates alone for the time being.

The central bank’s policymaking Open Market Committee ended its meeting without any announcement of a change, Fed spokesman Joseph Coyne indicated in a brief statement.

“I think what it says about the economy is they think it’s doing pretty well right now,” said Cynthia Latta, senior financial economist at DRI/McGraw Hill in Lexington, Mass.

However, a key Democratic senator who has been instrumental in stalling a vote on the renomination of Fed Chairman Alan Greenspan criticized the Fed’s inaction.

“The Federal Reserve’s decision to not lower interest rates is a tremendous blow to the U.S. economy and the economic well-being of middle-class and working American families,” Sen. Tom Harkin of Iowa said in a statement.

The Fed’s inaction was accompanied by a small sell-off on Wall Street. The Dow Jones industrial average gave up 12.56 points to close at 5,736.26, ending a nine-session upward surge that had sent the index to record levels on expectations that inflation was under control.

After cutting the so-called federal funds rate in July and again in December and January to stimulate economic growth, the Fed decided in March to hold rates unchanged as signs of a rebounding economy emerged. The central bank’s target for the federal funds rate, the interest that banks charge on overnight loans, has been at 5.25% since January.

Economists said the Fed remains vigilant to signs of inflation, particularly in wages as spot labor shortages develop around the country. So far, there are no signs of wage inflation as businesses have been able to raise pay while cutting benefit costs, Latta said.

“But I think that’s the one thing they’re most attuned to right now,” she said. “If we see that in coming months, I think they will act to push up interest rates.”

For now, “price increases remained generally subdued and there were only scattered reports of wage pressures despite continued tight labor markets and somewhat stronger economic growth,” the Fed found in its Beige Book summary of economic conditions in the nation’s Federal Reserve districts for March and April.

In the first quarter, the nation’s economy as measured by its gross domestic product expanded at a modest--but still healthy--rate of 2.8%, well ahead of the 0.5% rate of the quarter before, the Commerce Department reported earlier this month.

At the same time, in the 12 months ending in April, the consumer price index for urban consumers increased 2.9%, the Labor Department reported. Excluding volatile food and energy prices (up 5.9% mainly as a result of higher gasoline prices) the so-called core rate rose 2.7%.

Economists such as Larry J. Kimbell, director of the UCLA Anderson Forecast, believe the moderate growth and low inflation should continue. UCLA’s own forecast predicts the economy will grow at a 2.2% rate in 1996, with inflation of 2.5%.

But stronger growth could spur action by the Fed later in the year. “If we saw several more quarters of 2.8% growth and lower employment with it, then they would [raise rates],” Kimbell said.

Times Wires Services contributed to this report.