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Non-Tech : Moguls Mantra to the Markets -- Ignore unavailable to you. Want to Upgrade?

To: sdheart who wrote (11)	11/16/2000 12:11:41 AM
From: $Mogul	Respond to of 220

Fed Stands Pat on Rates, Warns of Risks By Knut Engelmann Nov 15 5:11pm ET WASHINGTON (Reuters) - The Federal Reserve kept key U.S. interest rates unchanged on Wednesday but said a recent slowdown in the world's biggest economy had not gone far enough yet to warrant an ``all clear'' on the inflation front. The central bank's move, largely anticipated by financial markets, leaves the key overnight fed funds bank lending rate -- which sets the standard for credit costs throughout the economy -- at 6.5 percent, where it has been since May. The more symbolic discount rate on Fed loans to commercial banks remains at 6.0 percent. The Fed said that while softer demand and tighter financial market conditions indicated the economy could continue to grow below its actual potential for a while, the slowdown had not been sufficient to merit a change in its long-standing view that inflation remains the number one economic threat. That disappointed some in financial markets who had hoped the Fed would declare a clear victory over inflation. Stocks shed some gains but still managed to close on a positive note. The price of most U.S. Treasury securities rose, however, as bond investors applauded the Fed's continued vigilance. ``The easing of demand pressures has not been sufficient to warrant a change in the Committee's judgement that...the risks continue to be weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future,'' the central bank's rate-setting Federal Open Market Committee said in a statement after its closed-door meeting. Explaining its decision to stick with an inflation warning -- which in theory leaves the door open to renewed rate rises -- the Fed said a tight jobs market and a recent rise in energy prices still posed inflation risks that warranted monitoring. RISKS LINGERING ``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 central bank said. But in notably softer language than in previous FOMC statements, it added: ``Softening in business and household demand and tightening conditions in financial markets over recent months suggest the economy could expand for a time at a pace below the productivity-enhanced rate of growth of its potential to produce.'' Analysts said the Fed's apparently diminished sense of urgency about the risks of resurgent price pressures signaled policymakers have moved closer to abandoning their inflation warning and may even herald a rate cut sometime next year. ``We read this comment as a sign that the committee is beginning to think aloud about shifting to a more neutral position,'' said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, N.Y. The Fed next meets on Dec. 19 and is widely expected to drop its inflation warning then. Many analysts think it will start cutting rates at some point next year to ensure the economy's ``soft landing'', a scenario in which growth slows to a less inflationary pace without causing a recession. The Fed's decision comes against the backdrop of a raft of statistics suggesting the robust U.S. economy has already slowed to a more moderate speed, helped by six increases in short-term interest rates between June 1999 and May. VICTORY SEEMS CLOSE Growth slowed to 2.7 percent in the July-September period from a scorching 5.6 percent pace in the second quarter, reassuring many at the Fed that victory in their battle against economic overheating is within reach. But analysts cautioned that more evidence of slowing growth and tame inflation was needed before the Fed could be convinced to cut credit costs from their current nine-year high. ``I think that they want to see more evidence that growth has slowed to an acceptable pace,'' said Stan Shipley, senior economist at Merrill Lynch Government Securities in New York. Others said continued political uncertainty over the outcome of a cliffhanger presidential election contributed to the Fed's decision to stick with the status quo. Investors are eager to see whether Republican George W. Bush or Democrat Al Gore will take the White House after a tough fight over the exact vote count in last week's election. ``Had it not been for the Fed's desire to stay out of the political limelight at this sensitive time, the balance of risks 'tilt' could well have been neutral,'' said David Orr, chief economist at First Union Corp. in Charlotte, N.C. The Fed has left credit costs unchanged at four successive meetings after capping its almost year-long rate rise campaign with a bold half-point increase in the fed funds rate in May. PILING UP The latest sign of slowing economic activity came earlier on Wednesday with the release of data showing U.S. industrial output weakened in October while businesses grew cautious about stockpiling goods as autumn began. The data had some Fed watchers convinced the time was ripe for the central bank to discard its standard inflation warning and open the door to rate cuts sooner rather than later. ``The Fed probably had enough justification to move to a neutral stance, given the slowdown,'' said Gary Thayer, chief economist at A.G. Edwards & Sons in St. Louis, Mo. U.S. manufacturers, whose cost of doing business would fall if interest rates were cut, also urged the Fed to rethink its stance. ``The Fed should begin to consider cutting interest rates early in 2001,'' said Jerry Jasinowski, head of the National Association of Manufacturers. As usual, the outgoing Clinton administration refrained from commenting on the Fed's decision, instead issuing a brief statement saying that it respected the central bank's independence and shared its goals of ``maintaining healthy economic growth while preserving low inflation''.