Fed Leaves Rates Alone
The Federal Reserve, waiting to gauge the impact of the Asian financial crisis on the U.S. economy, decided Wednesday not to raise interest rates despite its concern that an overheating U.S. economy may rekindle inflation.
After a two-day meeting, the board’s policy-setting Federal Open Market Committee left its target for the benchmark federal funds rate--the interest that banks charge one another on overnight loans--unchanged at 5.5%, where it has been since late last March.
The decision had been widely expected. Fed Chairman Alan Greenspan told the Senate Budget Committee last week that the central bank was caught between the twin risks posed by the surging economy here at home and the worsening slump in Asia.
He said he hoped the Asian crisis, which is expected to slow growth here in the United States moderately by the end of spring, “may afford some breathing room from inflation pressures.”
Economists are predicting the Asian crisis will shave half a percentage point or more from the U.S. economy’s growth rate--both by reducing the sales of U.S. exports in Asian markets and by making Asian goods more competitive here.
But Lyle E. Gramley, a former Fed governor now with the Mortgage Bankers’ Assn., said he believed that many board members still were uncertain about the effect of the Asian slump and wanted to stand pat so they could move either way if the economic picture changed.
“My guess is that they really have no idea as to whether they’re going to have to [raise or lower interest rates] or what,” Gramley said, “so they’re going to sit still until they see where they are. They’ll make a decision next fall, when the situation becomes clearer.”
Dana Johnson, managing director of First Chicago Capital Markets, agreed. “I think basically the Fed has adopted a reactive mode,” he said. “They’re going to hold policy steady at least through the first half of the year.”
Wednesday’s announcement marked the seventh meeting in a row that the 12-member committee has decided against raising interest rates, despite fears by some Fed governors last summer and fall that inflation would begin to hamper the U.S. economy.
Policymakers initially had hoped that the economy would slow down on its own--to a growth rate of 2% to 2.5% a year, which would help keep inflation in check. Instead, output accelerated during the October-December quarter, pushing growth to an annual rate of 4.3%.
At the same time, however, Fed officials have been surprised that the warning signs they saw last spring--suggesting that wage pressures may be about to accelerate--have not yet translated into faster increases in wholesale or consumer prices.
Some analysts have worried that if the Asian crisis worsens--and exchange rates of Asian countries fall further--the competition could force widespread price declines in the United States, heightening the risk of a recession here.
Bruce Steinberg, chief economist for Merrill Lynch & Co., said he believes that the possibility is very strong that the central bank will be forced to ease its policies--by reducing interest rates--sometime next spring.
Steinberg said the economic impact of the Asian crisis upon the United States probably would be the same as if the Fed panel had raised interest rates at a couple of its bimonthly meetings, slowing the growth of output and squeezing inflation pressures more.
Financial markets, which already had expected the Fed’s announcement, reacted indifferently to the move. The Dow Jones Industrial Average fell 30.64 points, or 0.38%, to close at 8,129.71--a modest decline that ended a two-day advance.
