Econ-J.Berry, The Post:"Federal Reserve Leaves Interest Rates Unchanged"
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>>>Federal Reserve Leaves Interest Rates Unchanged
By John M. Berry
Washington Post Staff Writer
Wednesday, November 15, 2000
Federal Reserve officials, increasingly convinced that U.S. economic growth has slowed to a sustainable pace that does not threaten to make inflation worse, today voted to leave their target for overnight interest rates unchanged at 6.5 percent.
The Federal Open Market Committee, the central bank's top policymaking group, also left in place an assessment that even though growth has slowed, the risk of inflation accelerating in the future continues to outweigh the possibility that growth could slow very sharply or that the economy could drop into a recession.
Some investors had been hoping the FOMC members officials would decide that those risks are balanced, which could be a first step toward reducing rates sometime in coming months.
The decisions, which had been widely expected by analysts and investors, had little immediate impact on financial markets.
In its announcement that it left its rate target unchanged, the FOMC said, "The utilization of the pool of available workers remains at an unusually high level, and the increase in energy prices, though having limited effect on core measures of prices to date, still harbors the possibility of raising inflation expectations.
"The committee, accordingly, continues to see a risk of heightened inflation pressures. However, softening in business and household demand and tightening conditions in financial markets over recent months suggest that the economy could expand for a time at a pace below the productivity-enhanced rate of growth of its potential to produce," it said.
Because Fed officials feared that very rapid economic growth last year threatened to drive the nation's already very low unemployment rate down to the point that inflationary wage hikes were likely, they began raising interest rates in the summer of 1999. In six steps, the last a half-percentage point increase last May, the target for the federal funds rate was lifted to 6.5 percent from an initial 4.75 percent. The federal funds rate is the interest rate financial institutions charge each other for overnight loans.
Since the May meeting, even as they saw evidence that economic growth was slowing, the FOMC members have concluded that the balance of risks was still tilted toward higher inflation.
During the 12 months ended in June, the U.S. economy grew 6.1 percent after adjustment for inflation. In the July-September period, growth slipped to an annual rate of 2.7 percent, less than half the pace of the previous four quarters. However, many forecasters say the 2.7 percent figure was held down by some temporary factors, including an unusual decline in federal government spending. As a result, they are predicting growth will bounce back to a 3 to 4 percent rate in the current quarter and remain in that range next year.
Such an outcome would be just about perfect from the Fed's point of view. It would constitute a so-called soft landing, an episode in which timely action in raising interest rates caused growth to slow enough to keep the economy from becoming overheated but not slow so much as to tip it into a recession.
Richard Berner, chief U.S. economist at Morgan Stanley Dean Witter and president of the National Association for Business Economics, this morning released the results of the latest survey of forecasts by NABE economists.
The economists "continue to see a soft landing for the economy with overall inflation declining and no recession in sight," Berner said. "They are clearly convinced that the Fed has accomplished its mission."
The midpoint of the forecasts for next year showed growth running at 3.4 percent rate despite financial market concerns about downside risk to the economy, Berner said. That would compare with a predicted 5.2 percent rate for this year. The moderation in growth would cause the current 3.9 percent jobless rate to rise slightly next year, but consumer price inflation is expected to decline to 2.6 percent from this year's 3.5 percent, which has been boosted by sharply rising energy prices.
Meanwhile, the Fed said that industrial production fell 0.1 percent last month, largely because of a 7.8 percent plunge in motor vehicle production. Automakers have closed a number of assembly plants temporarily because of recently weaker sales to make sure inventories on dealer lots don't get out of hand.
But outside of motor vehicles, output of the nation's factories was up 0.5 percent with production of high tech equipment up 3.2 percent for the month.
Even with the flat production figures, economist Stan Shipley of Merrill Lynch & Co. said that his firm still expects growth in the last three months of the year to increase at a 3.3 percent annual rate compared to the third quarter's 2.7 percent rate.
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