Econ--J. Berry, The Post: "Analysts Predict Fed Will Leave Rates Alone"
washingtonpost.com
>>>Analysts Predict Fed Will Leave Rates Alone
By John M. Berry
Washington Post Staff Writer
Friday , November 10, 2000 ; Page E01
Federal Reserve officials are likely to leave interest rates unchanged when they meet Wednesday, analysts virtually unanimously agree, noting that economic growth is slowing as the officials had hoped and that inflation is currently well contained except for energy prices.
But Fed watchers are divided over whether Fed Chairman Alan Greenspan and his colleagues on the Federal Open Market Committee will conclude once again that the risk of more inflation in the future is greater than the risk of faltering growth.
Many analysts predict that the FOMC, the central bank's top policymaking group, will keep that "bias" in the statement it issues after its deliberations, and which many investors take as a hint at the Fed's possible future action. But some others believe economic growth has slowed enough that the FOMC may be ready to drop that bias in favor of a "neutral" statement saying the risks are now balanced.
The issue is important because a shift to neutral probably would be taken by financial markets as a signal that rate cuts could be in offing, perhaps as soon as early next year. Many investors and analysts already are expecting such cuts, according to some market indicators.
It seems unlikely the FOMC will move to neutral as soon as next week, however, when the nation's jobless rate is still at a 30-year low of 3.9 percent, given Greenspan's and other Fed officials' often voiced concerns that very tight labor markets could lead to inflationary wage increases.
The standard language for the bias statement is "Against the background of its long-term goals of price stability and sustainable economic growth and of the information currently available, the Committee believes the risks continue to be weighted mainly toward conditions that may generate heightened inflation pressures in the future."
"The big question for next week is the bias," said Bill Dudley, chief economist at Goldman Sachs Group Inc. in New York. "I think they will keep it in place for a couple of reasons.
"First, with an unemployment rate of 3.9 percent, labor markets are still tight and there are some more signs of rising wage pressures. Second, inflation has been creeping up. And third, keeping the bias is the path of least resistance. It's the status quo.
"Besides, if they dropped the bias it could provoke a big rally in the stock and bond market, and that's not what the Fed wants to see," because of concerns that rising share prices would fuel added consumer demand and inflation pressures. "They are not unhappy to see the stock market going sideways" after a period in which the economy appeared to be in danger of overheating, Dudley said.
Based on futures contracts related to the level of the targeted federal funds rate--the interest rate financial institutions charge one another on overnight loans--investors are betting that the Fed will cut rates before long.
Currently the March futures contract suggests investors believe there is a 50-50 chance the Fed will lower its target for overnight rates by a quarter of a percentage point, to 6.25 percent, sometime in the first three months of next year, said economist Stephen D. Slifer at Lehman Brothers in New York.
"That could happen, of course, but it is not our call," Slifer said. "Simply put, we think that the economy is growing too quickly and that the labor markets are too tight for that to occur."
After growing at a 5.2 percent annual rate in the first half of this year, the U.S. economy took a bit of a breather in the July-September period, when growth slipped to a 2.7 percent rate. But a number of unusual factors may have exaggerated that slowing, such as a drop in federal government purchases of goods and services. Many forecasters expect growth to be up again in the current quarter, most likely to a 3.5 percent to 4 percent pace.
Even if growth bounces partway back, most Fed officials will be satisfied that the supercharged growth of late last year and earlier this year has tapered off.
"I would certainly say the latest data gives me, I think, a greater degree of comfort that we may be closer to the kind of balance than I would have felt, say, eight or nine months ago, when it looked pretty clearly like demand was exceeding supply," J. Alfred Broaddus, president of the Richmond Federal Reserve Bank, said in a recent speech.
"I think it's quite possible that the near- and intermediate-term outlook for the next year, year and a half, could be very bright indeed," Broaddus said. He explained that because of large gains in labor productivity--the amount of goods and services produced for each hour worked--the economy may be able to grow as much as 4 percent or 4.5 percent a year without causing the unemployment rate to decline.
The Fed raised its target for the federal funds rate six times from June 1999 through May 2000 to 6.5 percent, where it remains. The first concern was that the economy's very rapid growth would caused the jobless rate to fall even further and generate inflationary wage increases. As Broaddus said, the concern is largely gone for the moment.
But there is still a worry among some Fed officials that an unemployment rate in the neighborhood of 4 percent is so low that sooner or later those inflationary wage increases will emerge. That means that so long as joblessness stays so low and growth continues at a reasonably healthy rate, those policymakers are going to argue for keeping the FOMC's policy bias as it is.
© 2000 The Washington Post <<< |
