Divided Fed Leaves Rates Unchanged, but Worries Remain
A sharply divided Federal Reserve Board decided Tuesday not to raise interest rates, despite worries of some of its own top policymakers that the economy has been growing too fast to keep inflation in check for very much longer.
After a 4 1/2-hour meeting, the central bank’s policy-setting Federal Open Market Committee voted once again to postpone any rate hike in hopes that the economy will slow on its own between now and early summer, eliminating any need to head off new inflation pressures.
The panel’s decision--which leaves the Fed’s benchmark federal funds rate unchanged from the 5.5% level that has prevailed since March 1997--reflects a strong view by Fed Chairman Alan Greenspan that raising rates now would do more harm than good.
Besides the immediate impact of an increase on the U.S. economy, Greenspan is said to fear that a rate hike in the United States would exacerbate the financial crisis in Asia, which is already being heightened by political turmoil in Indonesia.
The federal funds rate is the amount that banks charge on overnight loans to one another.
The panel’s decision to stand pat had been widely expected. Although several top policymakers have called publicly for boosting interest rates now, Greenspan has been conspicuously silent on the issue--a stance that usually signals he is not ready to act just yet.
Wall Street took the vote in stride. Stocks rallied modestly, and bond yields were essentially unchanged.
But several private analysts speculated that the Fed may not be willing to wait much longer for the economy to slow, and could begin nudging interest rates up as early as its next meeting, on July 1, or possibly sometime in late summer.
“It wouldn’t take that much to push them there from here,” said David Kelly, a Fed watcher for Boston-based Primark Decision Economics Inc. “At the moment, the doves [on the Fed panel] seem to have the upper hand. But it’s a very close call.”
Fed policymakers have been increasingly split over the rate question. The economy has been growing far more rapidly than most analysts think is sustainable, and many fear that wages soon may begin accelerating sharply, threatening to revive inflation pressures.
But Greenspan has held back, hoping the economy would slow somewhat on its own, either as a result of natural forces or because of the impact here of the Asian economic slump, which still has not hit the United States in force.
The Fed has also been facing a political problem: With so few visible signs that inflation pressures are back on the rise, a move now to raise interest rates could easily spark a backlash, both in Congress and among the general public.
Moreover, many analysts believe that after months of false signals, the economy is finally beginning to slow down. The Commerce Department reported Tuesday that housing starts fell by 2.3% in April, and the manufacturing sector of the economy has been relatively weak.
Lynn Reaser, economist for NationsBank, said she expects the economy to start slowing this quarter, back toward the 2.5% annual growth rate that most analysts consider optimal. The economy has been growing at an annual rate of between 3% and 4%.
What has mystified economists is that despite the continuing boom, inflation has remained in check--thanks to a variety of factors, ranging from rising productivity and low energy prices to falling import prices and a slowdown in the cost of medical benefits.
The Fed last raised rates on March 25, 1997, in a quarter-percentage-point hike that policymakers called “a preemptive strike” to head off new wage pressures.
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* SLOWED STARTS: Construction starts on new homes and apartments fell for a second month. D3
* MARKETS UNFAZED: Stocks and bonds were little changed as the Fed held steady. D4
