Fed Won't Change Rates Some for Increase, But Not Greenspan
[FYI. About 1 month ago, Cramer wrote that Berry is the main writer to whom he pays attention for interest rate directions.]
By John M. Berry
Washington Post Staff Writer
Tuesday, May 19, 1998; Page C01
washingtonpost.com
There will be voices raised arguing for an interest rate increase when
Federal Reserve policymakers meet this morning, but Chairman Alan
Greenspan's won't be among them and therefore rates won't change,
according to a broad consensus of Fedwatchers.
All of the Fed officials, Greenspan included, regard the pace of U.S.
economic growth during the past year and a half as unsustainably fast,
particularly now that the nation's jobless rate has dropped to a super-low
4.3 percent, several officials said. Sooner or later, continued strong growth
and tight labor markets will begin to push inflation up, an outcome most
Fed officials are determined to avoid.
For months, Greenspan and the other members of the Fed's top
policymaking group, the Federal Open Market Committee, have been
expecting U.S. growth to slow, particularly with the economic turmoil in
Asia hurting exports of U.S. goods to that region. The question for the
committee is: How long to wait for growth to slow down before taking
steps to make that happen?
"We have had an extraordinary run of good luck," said former Fed vice
chairman Alan Blinder, who has returned to teaching economics at
Princeton University. "Steady-as-you-go has worked well for the Fed a
long time and is appropriate for a while longer."
Blinder said a series of developments -- including a strong U.S. dollar,
falling prices for imports, weak energy prices, moderation of health care
cost increases, productivity gains and technical changes to the consumer
price index that have reduced its rate of increase -- have allowed the
central bank to keep rates stable while unemployment and inflation have
come down.
"If we had not had this good luck, the Fed would already have had to raise
interest rates. In May 1998, are we in danger of losing all this? Not except
for medical care, but it's not always going to be this way," he predicted.
If he were at the table in the Fed boardroom today, he would not vote to
raise rates, Blinder said.
Some of the analysts who don't expect any action on rates remain
confident that growth is about to slow anyway.
"We are starting to see signs of the economy moderating somewhat," said
economist Mickey Levy, of NationsBank Montgomery Securities in New
York.
The most important sign of such slowing is in manufacturing, where
production last month was slightly lower than it was in December, the Fed
reported last week. And the share of production capacity actually being
used has dipped to levels not usually associated with accelerating inflation.
"When the Fed last tightened the federal funds rate on March 25, 1997,
and cited strong demand for a reason, the Fed had been seeing much
stronger industrial output and retail sales than have been recently reported,"
said Maury N. Harris, chief economist for PaineWebber Inc. in New
York. The recent data are "not strong enough to justify Fed tightening."
The federal funds rate is the interest rate banks charge one another for
overnight loans.
Nevertheless, consumers -- whose confidence levels are high -- continue
to increase their spending somewhat faster than many forecasters had
expected, given their spending spree in the first couple of months this year.
As a result, growth forecasts for this quarter have begun to creep toward
2.5 percent or 3 percent, after a 4.2 percent rate from January to March.
And then there is the wild card of inventories. Despite flat production and
healthy demand by both consumers and businesses, stocks of unsold
goods are still expanding. Sooner or later, production is going to have to
be trimmed further to halt the ever greater accumulation of inventories,
many analysts said.
Meanwhile, with unemployment low and falling, and labor markets tight in
most of the country, average hourly earnings were up 4.4 percent for the
12 months ended last month compared to 3.7 percent for the year ended
in April 1997. The issue on inflation for the Fed, the analysts said, is
whether those gains are being offset by productivity gains.
And to complicate matters further, there is Asia.
"In our opinion, the Asian economic crisis is far from over," Ian
Sheperdson, chief economist at HSBC Securities Inc. of New York, told
clients. "If we're right, the impact on the United States will intensify over
the next few months. . . . This, together with concerns over the possible
effect on Asia itself of higher U.S. rates, means that Greenspan will be
reluctant to raise rates even if the domestic economy does not slow in line
with the Fed's expectations. The risks are simply too big compared to the
potential benefits."
c Copyright 1998 The Washington Post Company
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