Fed Policymakers Leave Interest Rates Alone, as Expected
Federal Reserve Board officials, as widely expected, made no change Tuesday in short-term interest rates, amid overwhelming evidence that the nation’s economy is growing solidly at a nearly inflation-free pace.
The central bank’s policymaking committee met in Washington and adjourned with no announcement. Although most economists expected the Fed to stand pat, the stock market rallied sharply, sending the Dow Jones industrial average up 114.74 points, or 1.5%, to 7,918.10.
With inflation showing virtually no sign of accelerating, many analysts believe the Fed can comfortably wait until fall before deciding whether the economy’s pace merits tighter credit.
The central bank’s Federal Open Market Committee last bumped up interest rates in March, when it raised the so-called federal funds rate--the overnight lending rate among banks--by a quarter of a percentage point, to the current 5.5%, in a preemptive bid to choke off inflation pressures.
That move sparked a sell-off of nearly 10% in the blue-chip Dow index. The Fed has since held the line on rates.
Until inflation starts to get worse, the Fed’s target for short-term rates is not likely to shift, said L. Douglas Lee of HSBC Washington Analysis. “It is not a matter of economic growth or the level of unemployment,” two indicators often used to judge the likelihood of a Fed policy move, Lee said.
He noted that many business groups are telling the Fed they are doing business differently than in the past and that the economy can now operate with a low level of unemployment without adding to inflation. Usually, a jobless rate below 5% is associated with rising inflation, but that currently isn’t the case.
Meanwhile, the Fed is being pressured by others, including unions, members of Congress and some economists, not to raise rates, because the low level of unemployment is helping to produce jobs during the mandated transition of many welfare recipients into the work force.
“The bottom line [of these arguments] is you don’t need to raise interest rates,” Lee said. “That makes it very difficult for the Fed to make a policy change in anticipation of an increase in inflation. . . . They are going to sit on the sidelines and watch until something changes.”
Some economists, however, worry that Monday’s settlement of a two-week strike by 185,000 Teamsters union members against United Parcel Service of America could threaten the economy with higher inflation.
“We had an unusual amount of publicity that accompanied the UPS strike, and it looks like the union won on almost all counts,” said David Jones, chief economist at Aubrey G. Lanston & Co. in New York. “This may cause a lot of workers to decide that in this time of tight labor markets, they, too, deserve increased benefits and higher wages”--which could kindle inflationary fires.
But other analysts say most workers don’t have the same kind of leverage over their employers to simply dictate wages.
Meanwhile Tuesday, the Commerce Department reported that construction began on a smaller number of U.S. houses than expected in July, even as mortgage rates continued to decline, a sign the housing market won’t be the driving force behind U.S. growth in months to come.
Housing starts were unchanged last month at an annual rate of 1.447 million, the government said. In June, starts rose a revised 3.2%, to 1.447 million. June starts were previously reported as showing a 4.8% gain, to 1.452 million.
U.S. economic growth dipped to a 2.2% real annualized rate in the second quarter of the year from its breakneck pace of 4.9% in the January-March period, as consumers’ spending fizzled and unsold inventories began to build.
Still, if growth should pick up from its second-quarter lull at a rate that worries Fed officials, they may well be prompted to hit the brakes before the damage shows in inflation numbers, some economists warn.
“The odds favor that there will be a tightening at some point. It’s a tough call . . . but I would say it slightly favors the fourth quarter still,” said William Dudley, chief economist at Wall Street investment banking firm Goldman, Sachs & Co.
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Housing Starts
Seasonally adjusted annual rate, millions of units: July: 1.45
Source: Commerce Department
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* MARKET RALLY: Technology stocks helped erase almost every trace of Friday’s sell-off. D6
