***'U.S. Economy: Fed Sees More Growth, Little Inflation'
(Update2 /Rewrites first four paragraphs, adds closing markets.)
8:22pm EDT
<<Washington, Aug. 11 (Bloomberg) -- The U.S. economy's near-
record expansion is still virtually inflation-free, the Federal
Reserve said, taking the edge off concerns that central bankers
will raise interest rates again soon.
The Fed's latest ''beige book'' report card released today
cited gains in manufacturing, retail sales and construction,
along with rising loan demand as evidence of ''continued
strength'' in the economy.
The central bank also said that while most parts of the
country reported more jobs than workers to fill them, ''there is
no evidence of any broad-based pickup in consumer price
inflation'' or wages.
Bond yields rose to their highest levels in almost two years
earlier this week on concerns that Fed policy-makers might boost
borrowing costs when they meet again in two weeks to cool the
economy and keep inflation in check. Today's Fed report offered
little such ammunition, however, and the Treasury's benchmark 30-
year bond rose 13/32 of a point, pushing down its yield almost 4
basis points to 6.21 percent.
''People have been saying a Fed tightening is a slam-dunk on
Aug. 24, but it's not,'' said Diane Swonk, chief economist at
BankOne Corp. in Chicago.
Stocks also gained on the outlook for little inflation as
the current expansion stays on track to set a record for
longevity early next year. The Dow Jones Industrial Average rose
133 points, or 1.2 percent, to close at 10787.80 and the Nasdaq
Composite Index surged 75 points, or 3 percent, to 2564.95.
Tight Labor Markets
Tight labor markets were reported in most regions of the
country, with ''severe shortages of skilled construction
workers,'' the Fed report said. Prices for construction
materials, transportation and energy also have been rising, it
said.
Still, with little wage pressure showing, ''consumer prices
remain relatively stable despite some apparent intensification in
input price pressures,'' the report said.
''Retail sales, which had been robust in the second quarter,
decelerated somewhat in July, in some cases due to low
inventories of clearance merchandise,'' the report said.
''Manufacturing activity continues to expand in most parts of the
country, though a few districts indicate some softening.''
Construction of housing and commercial real estate remain
''generally strong,'' the report said. ''Loan demand is steady or
rising in most districts.''
New York Fed Report
The latest edition of Fed's regional outlook was compiled by
the Federal Reserve Bank of New York, based on information
collected before Aug. 3. It is based on reports from the Fed's 12
district banks, and is published in advance of meetings of the
Fed's policy-setting Open Market Committee. The next meeting is
Aug. 24.
At the last meeting on June 30, the FOMC voted to raise the
overnight bank lending rate by a quarter percentage point to 5
percent. Central bankers at the time cited labor market pressures
as why they ''must be especially alert to the emergence, or
potential emergence of inflationary forces that could undermine
economic growth.''
The latest beige book underscores other reports that the
economy isn't slowing as much as the Fed had expected earlier
this year.
The July employment report showed the economy added 310,000
workers, following a 273,000 increase in June, while hourly wages
rose at the fastest pace in half a year. Unemployment stayed just
a tenth of a point above the three-decade low of 4.2 percent
reached earlier in the year.
Greenspan's Concerns
That's just the mixture that Fed Chairman Alan Greenspan
warned about last month in his twice-yearly message to Congress
about the economy.
''If new data suggest it is likely that the pace of cost and
price increases will be picking up, the Federal Reserve will have
to act promptly and forcefully'' to raise interest rates, he told
the House Banking Committee on July 22.
Inflation, however, has remained in check. The consumer
price index was unchanged in May and June after jumping 0.7
percent in April. The core rate of the CPI, which excludes food
and energy costs, rose just 0.1 percent the previous two months.
And that's a conundrum for the Fed. ''At this particular
moment, the underlying core cost structure of the economy is
behaving, in my judgment, quite benignly,'' Greenspan told
Congress. ''There is no immediate evidence that I can see that
what we are dealing with is an incipient acceleration of core
inflation.'' The government will report on July consumer prices
next week.
Productivity Gains
One reason is that worker productivity has been rising.
''Only higher productivity could explain how tight labor markets
and rising wages can have such mild impact on unit labor costs
and profits,'' Dallas Federal Reserve Bank President Robert
McTeer said yesterday.
Higher productivity could ''keep the Goldilocks economy
going. Not too hot, not too cold, but just right,'' McTeer said.
Last month, the Fed forecast that U.S. economic growth would
show only a ''muted'' slowdown this year, as consumer price
inflation remains in its current range.
The economy grew at a 4.3 percent annual rate in the first
quarter and 2.3 percent pace in the second. Averaged together,
that's close to the pace forecast by the Fed.
The Fed expects the economy to grow at a 3.5 percent to 3.75
percent inflation-adjusted pace in 1999. That's just below the
roughly 4 percent expansion the economy sustained during the
first six months of the year and for each of the past two years.
And it exceeds the 2.5 percent to 3 percent growth pace the Fed
had forecast in February.>>
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