WASHINGTON, Aug 25 (Reuters) - The Federal Reserve
has given investors plenty of reason to hope its latest interest rate rise will be the last this year, but that is far from a sure bet
as dangers still lurk in the economic outlook.
In announcing its second rate increase in two months, the Fed said its actions should ''markedly
diminish the risk of rising inflation going forward.''
While lifting the federal funds and discount rates by a quarter-point each, the Fed said it had a
''neutral'' or open stance on future rates, as opposed to a formal bias to tighten that would have
signaled a readiness to move again soon.
But the economy's performance, rather than an FOMC statement or an official policy stance, will
provide the ultimate signal on the fate of U.S. borrowing costs.
''The Fed's statement does not preclude further action,'' said Bruce Steinberg, chief economist at
Merrill Lynch in New York. ''I think it means the chances are low that they will go again. With
all that said, it depends on the economic data.''
The Fed cited persistently strong consumer demand, a tight labor market and signs of stronger
demand abroad as reasons for its well-anticipated decision to nudge up interest rates for the
second time in two months.
Analysts said reports on those factors will be key for future Fed policy. Some said the numbers
could well remain strong after several years in which the booming U.S. economy has stubbornly
refused to slow.
Indeed, no sooner did Fed officials wrap up their meeting than new data underscored that the
long-struggling manufacturing sector is on the mend.
The Commerce Department said on Wednesday that new orders for costly manufactured goods
shot up by 3.3 percent in July, a rise that reflected broad-based demand for cars, appliances,
airplanes and other items.
''The orders report tells (Fed Chairman Alan) Greenspan that there is no slowdown in sight,''
said economist Joel Naroff of Naroff Economic Advisers.
''The July durable goods report is the first brick in the road that could take us to another rate
increase on Oct. 5,'' he said, referring to the date of the Fed's next policy meeting.
Still, labor-market data is expected to be of paramount importance to Greenspan.
''Greenspan has repeatedly said that what he is most worried about is the tightness of the labor
market,'' Steinberg said. ''If between now and the next FOMC we get another employment
report that suggests a continued strengthening in the already tight labor market, the Fed could
move again in October.''
Steinberg forecasts a slowing economy and a cooling off in the labor market that would keep the
Fed on the sidelines.
But some other analysts saw that as wishful thinking. ''I don't think Fed officials are going to get
want they want in terms of the signs of slower growth,'' said chief economist Mark Zandi at
Regional Financial Associates in West Chester, Pa.
''They will probably act one more time this year,'' he said.
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