Federal Reserve Board officials decided Wednesday to leave short-term interest rates unchanged--despite recently strong economic growth--because of the persistence of low inflation.
The widely expected decision had little impact on financial markets.
It has now been more than a year since the Fed last changed its target for rates, but with inflation under control and the economy performing well, Fed Chairman Alan Greenspan and other central bank policymakers have been content not to tinker. Many financial analysts said it is also unlikely that changes will be made at its next meeting on March 25.
As usual when there is no change in policy, Fed spokesman Joseph R. Coyne simply announced that the meeting had ended, with no further explanation.
The Fed left the target on overnight loans between banks at 5.25%, and the discount rate at 5%.
The Fed’s decision, coming at the end of a two-day session, undoubtedly was influenced by the fact that most recent economic statistics have been pointing toward some cooling after a surge in growth late last year, analysts said. A year ago at a similar two-day session of the Fed, most of the board members’ individual forecasts called for growth of a bit more than 2% from the fourth quarter of 1995 to the fourth quarter of last year.
Last week, the Commerce Department estimated the actual increase at 3.4%, with growth hitting an annual rate of 4.7% in the final three months of the year. However, according to price indexes linked to those growth figures, inflation fell last year despite the nation’s faster economic pace.
At a confirmation hearing Wednesday on her nomination to be chairman of the president’s Council of Economic Advisors, Fed Board member Janet L. Yellen told the Senate Banking Committee, “Throughout our long expansion, inflation has remained low and fallen by most broad measures, and investment in plant and equipment--the driving force of this expansion--has grown at a phenomenal pace.”
All that investment by businesses has raised the productive capacity of many industries to the point that while labor markets are tight, product markets are not. Indexes of industrial commodity prices have been trending downward, and this week the National Assn. of Purchasing Management said that delivery of items ordered by manufacturers speeded up last month--a sign that there is no strain in that part of the economy.
In addition, the Commerce Department reported Wednesday that new orders received by manufacturers fell 1.3% in December, following a 0.5% drop the month before. These numbers jump around from month to month, but some analysts said the report is another indication that growth is likely to be slower in coming months than it was late last year.
Meanwhile, the attention of investors and analysts has shifted to the Labor Department’s report due Friday on payroll employment and the unemployment rate for last month for further evidence on where the economy is headed.
* MARKET SKIDS
A sell-off in technology stocks sparked an 86.58-point loss in the Dow. D3