Fed Leaves Short-Term Rates Unchanged
Federal Reserve Board officials on Wednesday made no change in short-term interest rates at the end of their two-day policymaking session, which was set against a backdrop of moderate economic growth and no sign of increasing inflation.
The decision had been widely expected because almost all recent economic figures, including some out Wednesday, have indicated that growth slowed to around a 2% annual rate this spring. Many Fed officials had expressed concern earlier this year that the much more rapid 5.9% growth rate of the first quarter, coming when the nation’s unemployment rate was already very low, threatened to make inflation worse.
But after a burst of spending at the beginning of the year, consumers have slowed their purchases to the point that retail sales in May were lower than they were in February. Also, new-car and new-truck sales figures released Wednesday showed a sharp decline for last month, an indication that overall June retail sales also will turn out to be lower than in February, analysts said.
The stock and bond markets rallied on the news. The blue-chip Dow Jones industrial average ended up 73.05 points at 7,795.38, just below its June 20 record close of 7,796.51. Bond prices rose, with the yield on the long bond falling to 6.71%.
“I think it made very good sense for the Fed to sit still,” said economist Lyle Gramley of the Mortgage Bankers Assn. of America.
On the other hand, Gramley expects a rebound in consumer spending in coming months that would raise new worries about inflation, particularly with the nation’s jobless rate now under 5%. If growth strengthens noticeably, it could cause the Fed to raise short-term rates later this year.
“I think that conditions in the economy are so strong, it is hard not to expect a bounce back,” Gramley said, citing high levels of consumer confidence and other factors.
However, other analysts aren’t looking for faster growth any time soon. For instance, Mickey J. Levy, chief financial economist for NationsBank in New York, said that for the first time in a year and a half, production has been outstripping sales, so that businesses’ stock of unsold goods is rising unintentionally. This situation usually means fewer new goods are ordered, and factory output and economic growth slow.
“The best example is the auto industry, where the firms are offering price incentives to whittle down inventories,” Levy said. “I am looking at 2% growth in both the second and third quarter.”
