Fed Leaves Interest Rates Alone; Slowdown Seen
Confounding the prediction of most analysts, the Federal Reserve Board on Tuesday left interest rates unchanged in a sign that it believes the U.S. economy is slowing after a strong first half of the year.
The Fed declined to act despite widespread anticipation that it would raise interest rates modestly to choke off the prospect of inflation before escalating prices take hold in an economy that has been expanding at a rapid rate since early spring.
But the board--eyeing soft retail sales and modest wage increases--apparently concluded that the economy was losing steam in the third quarter and did not need to be reined in by an interest rate boost.
The action by the nominally apolitical panel at its last meeting before the November election cheered President Clinton and deprived his Republican challenger, Bob Dole, of a potential line of attack. The board historically has refrained from major interest-rate movements in the run-up to national elections.
Tuesday’s non-action indicates that Fed Chairman Alan Greenspan was able to convince a majority of the board that “inflation is not yet a problem and that the Fed has room to wait and see whether the consumer slowdown of the past couple of months will continue,” said Joel L. Naroff, chief bank economist for First Union Corp., a banking concern based in Charlotte, N.C.
Naroff added that he doubts that either Clinton or Dole will be able to get much political traction from the decision. “I think this is a politically neutral action,” Naroff said.
Dole likely would have portrayed a hike as evidence that inflation was returning after several years of virtually flat consumer prices.
“I just think it shows we’ve got a strong economy with no inflation. I’m glad about that,” Clinton said during a campaign visit to New Jersey. Clinton seldom comments on Fed actions.
Neither Dole nor his aides had an immediate comment.
The closely watched decision by the Fed’s 12-member Open Market Committee left the discount rate--which the Federal Reserve charges banks for short-term loans--unchanged at 5%. The federal funds rate, which banks charge each other for overnight loans, remained at 5.25%.
Both rates have remained steady since February 1995.
The committee members adjourned their last meeting before the election with a statement from spokesman Joseph Coyne.
“The Federal Open Market Committee meeting ended at 1:40 p.m. There is no further announcement,” Coyne said.
Fed-watchers said that Tuesday’s meeting likely was one of the committee’s more contentious sessions in months.
A document leaked last week revealed that presidents of eight of the 12 regional Federal Reserve banks believed that an immediate interest-rate increase was warranted because of inflationary pressures and unsustainable economic growth.
Fed officials neither confirmed nor denied the accuracy of the report but called in the FBI to search for the source of the leak.
“This was a very close decision,” said Lynn Reaser, chief economist at Barnett Banks Inc. of Florida. “The majority apparently believes that the consumer debt burden, the state of international economies and the impact of long-term interest rates will all tend to moderate the economy’s pace.”
She said that policy-makers were working from an assumption that the economy would grow at an annual rate of less than 3% in the second half of the year and less than 2.5% in 1997.
The growth rate for the first half of this year was a robust 3.4%, boosted by a 4.8% expansion rate in the April-June period.
Gary Schlossberg, economic analyst at Wells Fargo Bank in San Francisco, was among those in the financial community arguing against an immediate rate hike.
“Inflation is still subdued. Economic activity shows signs of slowing. Chain store sales and auto sales are down from August,” Schlossberg said. “Why move now, right in midst of a political campaign? Why take the chance of tightening now and then have to flip-flop, going back and easing rates later this year?”
Also on Tuesday, the Conference Board, a New York-based business research group, released a survey showing that consumer confidence is close to its highest point in eight years.
Delos Smith, the board’s senior business analyst, said that the index is now at 111.8, compared to 57.3 at this point in the last election cycle when Clinton was on the verge of unseating former President Bush, in large part because of economic worries among voters.
The current number represents bad news for Dole. “It’s very hard for the incumbent to lose with a good strong economy and consumer confidence this high,” Smith said. “You have to find other reasons to throw him out of office.”
* RATE RELIEF? Impact of decision on markets, California economy. D1, D3
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BACKGROUND
The Federal Open Market Committee is composed of the seven governors of the Federal Reserve system and the presidents of five of the 12 regional Federal Reserve banks. The president of the Federal Reserve Bank of New York is always a member; the other four seats rotate among the other regional bank presidents. The committee meets in strict secrecy eight times a year to make Fed policy. It has control over the federal funds rate, the interest rate banks charge each other for overnight loans, as well as the discount rate, the interest rate that the Fed charges banks. If the committee decides inflation is a threat and raises the interest rate, it has the effect of subduing activity in housing and other key sectors. If it sees recession as a threat, it may cut the rate to stimulate the economy.
