Fed Leaves Interest Rates Unchanged
Federal Reserve Board officials, reassured by new reports of low and falling inflation and worried about world financial markets roiled by the economic woes of several East Asian nations, made no change in interest rates when they met in a policymaking session Tuesday.
Shortly before the meeting began, the Labor Department said the consumer price index rose only 0.1% last month. Since November of last year, the CPI is up just 1.8%, the smallest rise for a 12-month period in more than a decade. The so-called core CPI, which excludes volatile food and energy prices, also rose 0.1% last month and was up 2.2% over the last 12 months.
In a separate report Tuesday, the Commerce Department said housing starts unexpectedly rose 0.8% last month to an annual rate of 1.531 million, the highest since February.
The Fed’s decision to leave rates alone had been widely expected by investors and analysts and had little impact on U.S. financial markets.
The reassurance on inflation was important to the central bank because strong economic growth over the last year has driven the nation’s jobless rate down to 4.6%, a level that in the past has usually been accompanied by rapidly rising wages and accelerating inflation. If not for the expected impact of the Asian situation on the U.S. economy, many analysts believe the Fed would be raising short-term interest rates to cool things off and keep inflation from worsening.
But the problems in Asia are just beginning to restrain U.S. growth, much the same way higher short-term interest rates would, and many forecasters are predicting U.S. exports to those troubled nations will fall while U.S. imports rise. Such an increase in the U.S. trade deficit would reduce demand for American production and thus trim half a percentage point or more from 1998’s growth rate, the forecasters say.
With other factors such as labor shortages and federal fiscal policy also likely to restrain the economy a bit, forecasters generally expect growth to dip to a range of 2% to 2.5% in 1998, down from the 3.7% average rate of the last four quarters.
Fed Chairman Alan Greenspan and other officials remain concerned, however, that labor markets in this country are so tight that if growth doesn’t slow, a scramble by employers for workers could trigger a round of wage increases and higher prices. For the moment, policymakers decided to wait and see how the Asian situation plays out.
Longer-term, analysts’ views diverge widely over whether the Fed will leave rates alone more or less indefinitely, cut them, or raise them.
“The subdued inflation performance does not yet reflect the impact of much lower prices for imported goods from Asia,” said Cheryl Katz, an economist at Merrill Lynch & Co. in New York.
