Fed Votes to Put Off 7th Straight Rate Hike
The Federal Reserve Board, apparently satisfied that its credit-tightening campaign has finally begun to slow the economy, voted Wednesday to hold off on a seventh straight interest-rate hike. But the Fed added that it remains worried about inflation.
Thus the central bank implied it would resume raising borrowing costs at its Aug. 22 meeting unless it sees more definitive signs of economic weakness over the next two months.
New-home construction and consumer spending on big-ticket items such as cars and major appliances have slowed in recent months, and consumer confidence has fallen. But Fed policymakers cautioned that such evidence is “still tentative and preliminary.”
On balance, the Fed added, “the risks continue to be weighted mainly toward conditions that may generate heightened inflation pressures.”
Wednesday’s decision leaves the federal funds rate--the rate for overnight bank-to-bank loans--at 6.5%, the highest level since January 1991. When the Fed started the current round of tightening last June 30, the fed funds rate was at 4.75%.
On Wall Street, some Fed watchers were encouraged by what one called a “conciliatory tone” in the brief statement that the Fed’s policymaking Open Market Committee released at the close of its two-day meeting.
“Recent data suggest that the expansion of aggregate demand may be moderating toward a pace closer to the rate of growth of the economy’s potential to produce,” the board said, in classic Fed-speak.
It means the economy may be headed toward an annual gross domestic product growth rate of 3.5% to 4.0%, which Fed Chairman Alan Greenspan considers about as fast as the economy can grow without sparking inflation. By contrast, GDP grew at an annual rate of 5.4% in the first quarter of this year and a blistering 7.3% in the quarter before that.
“Although core measures of prices are rising slightly faster than a year ago, continuing rapid advances in productivity have been containing costs and holding down underlying price pressures,” the Fed added.
Other Rates React to Rising Costs
It was the first time in a year that the FOMC had offered anything other than anti-inflationary language in its official statements.
“It’s like there’s light at the end of the tunnel,” said Arthur Hogan, chief market analyst for Jefferies & Co. in Boston. He is among a number of stock market pros who believe the Fed may be finished raising rates.
As the cost of interbank loans has climbed, other interest rates have moved up in reaction. The bank prime lending rate has risen to 9.5% from 7.75% a year ago, driving up the cost of home equity loans, many of which are tied to the prime.
Mortgage rates, however, have fallen from their mid-May peak along with long-term bond rates, as the bond market sensed a cooling in the economy. The Freddie Mac average for 30-year mortgages fell to 8.14% by last Friday, down from 8.64% the week ended May 19.
Anticipating a “soft landing” for the economy--that is, a slowdown without a recession--the technology-laden Nasdaq stock market has rebounded from its April and May doldrums.
“We’ve gone from flirting with 3,000 [on the Nasdaq composite index] to flirting with 4,000,” said Hogan, who expects technology shares to stay strong through the end of the year.
The Fed continues to weigh mixed economic signals.
Earlier Wednesday, the U.S. Commerce Department reported that factory orders for durable goods rose a surprisingly strong 6% in May after a 5.7% decline in April. The biggest jump was in orders for electronic equipment, up 26%.
But Delos Smith, senior business analyst for the Conference Board in Washington, dismissed the suggestion that the report means the economy somehow reignited last month. The monthly durable-goods numbers are notoriously volatile, he said, adding that even with May’s gains, orders remain below the March levels.
Smith contends that the recent sharp rise in gasoline prices--despite its inflationary implications--is actually helping the Fed in its mission to slow the economy because the effect is to dampen consumer spending.
The psychological impact of $2-a-gallon pump prices in some parts of the country makes people ask themselves, “Can I go to the movies, can I go to that extra dinner?” Smith said.
On the other hand, rising oil prices can create more generalized inflation by boosting the cost of airline tickets, trucking fees, chemicals and other oil-dependent products and services. So for the Fed, $32-a-barrel crude oil is at best a mixed blessing.
Meanwhile, the job market continues to be extremely tight, and labor costs account for about two-thirds of the consumer price index, said Sung Won Sohn, chief economist at Wells Fargo Economics in Minneapolis. Sohn believes there are more interest-rate hikes ahead.
The Fed faces political pressures of two kinds in the months ahead. It has already come under criticism from lawmakers in both parties who think the tightening campaign has inflicted pain on consumers for no good reason. Inflation, the critics argue, remains under wraps.
Another rate hike in August would almost certainly prompt another wave of such complaints.
At the same time, the Fed may regard the August meeting as its last chance to take action before the presidential campaign moves into high gear. To avoid accusations of partisanship, analysts said, the Fed would like to avoid any interest-rate moves on Oct. 3--the only meeting between August and the November election.
* MARKETS REACT
Stocks closed broadly higher but Treasury bonds were mostly unchanged. C4
