Rate Hike Unlikely for Now, Analysts Say

Although the Federal Reserve is not yet convinced that the economy is slowing, central bankers probably will leave interest rates unchanged at their policy meeting this week while warning of inflation risks ahead. Wall Street economists expect Fed Chairman Alan Greenspan and the other Fed policymakers to sit on their hands at the Federal Open Market Committee meeting Tuesday and Wednesday. But many think it is too soon for the Fed to declare victory in the battle against inflation. The Fed has already raised short-term rates six times over the last year, but most leading Wall Street firms polled by Reuters last week predicted that it would increase borrowing costs again in August. There is mounting evidence that credit tightening over the last 12 months has begun to take a toll on growth, particularly in interest-rate sensitive areas such as housing and consumer spending on big-ticket items. The Fed is at a crucial juncture in its efforts to engineer a “soft landing,” trying to keep the economy from overheating while not overshooting with an excess of credit tightening that could throw the country into recession. For the last few quarters, demand in the economy was running well ahead of supply, and it was this imbalance that the Fed feared would fuel higher wages and prices.