Fed May Again Do Battle With Stubborn Economy

Tame inflation and soaring worker productivity will let the Federal Reserve hold its fire on interest rates this week, but analysts expect central bankers to keep their fingers on the trigger as they wait to see whether the stubbornly strong economy has cooled. All but a handful of financial analysts expect Federal Reserve Chairman Alan Greenspan and its Open Market Committee to leave interest rates unchanged at their meeting Tuesday amid evidence that inflation is mild despite low unemployment and still sizzling growth. “With inflation under good control and the economy slowing, the Fed has the luxury to sit around and wait,” said Lyle Gramley, a former Fed governor who is now a consulting economist at the Mortgage Bankers Assn. of America. But analysts also expect the Fed will warn that its war against inflation is not over, suggesting more rate increases might be on the way. Some Fed officials are likely to argue that the current 4% unemployment rate--hovering near a 30-year-low--is the biggest inflation risk of all. The Fed has raised U.S. interest rates six times since June 1999 to ward off inflation by slowing the U.S. economy to a more sustainable pace. The federal funds overnight bank lending rate, which sets the bar for the cost of borrowing to buy anything from cars to refrigerators to homes, now stands at 6.5%, the highest level in nearly a decade.