Fed Takes No Action, in Bow to Stability
In response to the surprisingly buoyant U.S. economy, the Federal Reserve chose to leave interest rates unchanged Tuesday, backing away from the aggressive campaign of rate cuts it launched in September.
The decision, made during a closed-door meeting of the Federal Open Market Committee, was expected and caused no ripples in the financial markets. At the same time, it underscored the effectiveness of this fall’s cuts, which were imposed at a time when many feared that financial turmoil overseas would take a severe toll on the United States.
“The question is what do [Fed officials] do as we go into 1999?” said Bruce Steinberg, chief economist at Merrill Lynch in New York. “And I think there will be more [rate cuts], but only after the economy shows signs of slowing.”
Tuesday’s decision leaves the federal funds rate, which banks charge each other for overnight loans, at 4.75%, the lowest level in four years and three-quarters of a point lower than where it stood when the Fed began pushing rates down in late September. The discount rate, which the Fed charges other financial institutions for loans, remains at 4.50%.
The Fed offered no official explanation for its decision, which it signaled shortly before 10 a.m. Pacific time. But at a time of unusually high employment, low inflation and solid economic growth--all against the backdrop of calmer global markets--no explanation was needed.
“What was occurring in August and September was an unraveling,” said Don Hilber, an economist with Wells Fargo, referring to a period of high anxiety in the global marketplace that spread quickly from Asia to Russia to Brazil, unnerving investors around the world and prompting the Fed to begin a series of interest rate cuts.
Subsequent rate cuts, including an unscheduled reduction on Oct. 15 and a further easing on Nov. 17, defused a potential credit squeeze in this country and abroad, stabilized the stock market and helped reverse a slide in consumer confidence. Indeed, Federal Reserve Chairman Alan Greenspan expressed concerns about a global credit crunch when he began advocating an interest rate cut in September.
By all accounts, the rate cuts bolstered the economy. “They stemmed that unraveling, and there didn’t seem to be a reason this week to lower rates again,” Hilber said.
For now, statistics tell the story of an economy that doesn’t seem to need a great deal of help from policymakers. The 4.4% unemployment rate hovers barely above the 28-year low of 4.3% reached earlier this year. Inflation is tame, running below 2% for 1998.
Confident consumers are loading up on holiday gifts--often paid for with their gains in the dizzying, resilient stock market. Economic growth has been robust and is expected to exceed 3.5% for the year.
By the middle of November, when Fed officials last cut interest rates, they were suggesting that a strong economy and increasingly stable financial picture argued against further reductions in the near future.
But the picture may not remain quite so rosy, according to forecasters. Many analysts expect a significant decline in economic growth next year, which would unleash new pressures on the Fed to reduce rates again.
Among manufacturers, a sector hit particularly hard by weakness overseas, there is special concern about keeping interest rates low to stimulate the economy.
“I applaud the Fed for lowering rates three times in recent months,” said Jerry Jasinowski, president of the National Assn. of Manufacturers.
“At the same time, rates remain too high, and it is my hope that in the coming months the Fed will cut rates further,” he added.
Many experts also doubt that consumers can maintain their level of spending, which has outpaced income gains this year. Business investment in technology and plants has been on a downtrend, and slumping foreign regions of the world will continue to weigh on demand for U.S. exports.
In addition, some highly publicized corporate layoffs have yet to be carried out, which will spread further weakness in the economy next year.
“We think the Fed still might have one or two more interest rate cuts in them,” said Wells Fargo’s Hilber. But acknowledging the economy’s reservoir of strength, he added, “Probably not more than that.”
Steinberg of Merrill Lynch said that although “the economy was cooking” in the year drawing to a close, he anticipates a “significant slowdown” in the months ahead and predicted that the Fed might reduce interest rates another three-quarters of a point.
