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Strategies & Market Trends : VOLTAIRE'S PORCH-MODERATED -- Ignore unavailable to you. Want to Upgrade?

To: lindelgs who wrote (5151)	10/3/2000 7:27:32 AM
From: lindelgs	Respond to of 65232

Fed Likely to Keep Rates Steady, Repeat Warning By Glenn Somerville Oct 3 1:57am ET WASHINGTON (Reuters) - With the speeding U.S. economy already beginning to slow, the Federal Reserve is widely expected to keep interest rates steady when it meets on Tuesday while repeating its standard warning on inflation. Analysts say the only potential drama lies in whether the rate-setting Federal Open Market Committee might decide the slowdown is abrupt enough to permit it to drop the inflation warning -- shifting to a more neutral or balanced assessment of the risks the economy faces going forward. Still, most think rising oil prices alone will keep the standard inflation caution in the Fed's public statement. FOMC members were scheduled to begin meeting at 9:00 a.m. EDT (1300 GMT) with a decision to be issued at about 2:15 p.m. (1815 GMT) Rates have been on hold since May, when the key federal funds rate for overnight loans between banks was pushed up a half percentage point to 6.5 percent and the more symbolic discount rate on Fed loans to banks went to 6.0 percent. That was the sixth in a campaign of rate rises initiated in mid-1999. FOMC members decided to keep rates steady at two subsequent sessions in June and August as they assessed the impact of costlier credit on the economy. Fresh evidence of economic cooling came on Monday in a widely watched monthly report from the National Association of Purchasing Management that showed the manufacturing sector contracted for a second straight month in September. The index of manufacturing activity, which gauges a series of industry-sensitive measures from prices to new orders, inched up to 49.9 from 49.5 in August. But any reading under 50 implies the industrial sector, which makes up about one-fifth of the national economy, was shrinking. New orders dropped in September and prices were up, which the association blamed on costlier energy. ``The Federal Reserve is probably pleased that the economy continues to show signs of moderating,'' said economist Lynn Reaser of Bank of America Capital Management Inc. in St. Louis, Missouri. ``The purchasing managers report confirms a much more subdued pace and inflation still seems to be in check.'' Reaser said there was a possibility the Fed would change its warning that the balance of risks remains weighted toward higher inflation, which is generally taken as a signal that the next move was more likely to be a rate increase than a cut. But she added that she doubted that would happen, primarily because doing so now might trigger an over-reaction in stock markets and add greater spending stimulus than the Fed wants. In addition, the world's largest economy still packs plenty of punch as shown by higher August orders for costly durable goods, robust sales of previously owned homes and high levels of consumer confidence and spending. ``The economy is slowing but it's not wilting at a rapid pace,'' Reaser said. Tuesday's meeting is the final FOMC gathering before the Nov. 7 presidential election, an added incentive for the U.S. central bank to stay on the sidelines and so forestall any challenge to its nonpolitical status. But analysts emphasized that politics alone would not be a deciding factor in any Fed decision. ``I have no doubt that if there was a compelling surge in inflation pressures they'd tighten, but there's not, so they'd just as soon not become part of the political process,'' said economist David Orr of First Union Corp. in Charlotte, North Carolina. Orr expects no rate change and a renewed warning about inflation risks, if only to show the Fed remains wary about energy. ``Policymakers wouldn't want to send a message that the spike in energy prices isn't of concern. That wouldn't be smart,'' he said. Three past energy price shocks -- in 1973, 1979 and 1990 -- led to recessions. Both Orr and Reaser noted that financial markets were anticipating that the U.S. central bank is heading toward a change in its interest-rate policy later this year or early next year. Falling yields on two-year U.S. Treasury notes, now under 6 percent, indicate a belief that the Fed is headed toward lower rates instead of more hikes, they said. ``The markets already have begun to predict that the next move likely will be an easing, whenever it happens,'' Reaser said.