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Fed Predicted to Hold Steady on Interest Rates : Economy: Analysts see inflation worries and sluggish growth maintaining the status quo for at least six months.

May 18, 1993|From Associated Press

WASHINGTON — Inflationary pressures are too worrisome to cut interest rates, and the economy is too weak to raise them--so the Federal Reserve is likely to sit tight when Chairman Alan Greenspan and other top bank officials meet behind closed doors today, analysts say.

Some forecasters believe that the hands-off approach could last another six months, meaning mortgage rates and other consumer and business interest rates could remain near two-decade lows for most of this year.

"Inflation is too strong for the Fed to ease (short-term interest rates), and the economy is too weak for the Fed to tighten, so it doesn't do either," said Donald Ratajczak, director of economic forecasting for Georgia State University.

Last week, financial markets were rattled when inflation at both the wholesale and retail levels shot up at unexpectedly sharp rates. So far this year, consumer prices are rising at an annual rate of 4.2%, significantly higher than last year's 2.9% increase.

President Clinton and his top economic advisers, concerned that the inflation figures will prompt the Fed to raise interest rates and thus dampen growth, sought to play down last week's reports.

"We ought to wait until we have some more evidence before we raise interest rates in an economy where industrial capacity is only 80%," Clinton said last week.

Many private economists agree that with U.S. factories still coping with a large amount of unused capacity, the recent blip in inflation is not too worrisome.

An even bigger factor, they say, is that employment costs, which account for two-thirds of a product's price, rose from January through March at the lowest rate in three decades.

"The inflation we have seen so far this year has really just been a rebound from unusually low commodity prices last year," said David Wyss, an economist at DRI-McGraw Hill Inc., a Lexington, Mass., consulting firm.

For that reason, Wyss and many other economists believe that the Fed will choose to remain on the sidelines, where it has been since September, when it pushed its target for the federal funds rate--the interest banks charge each other on overnight loans--down to 3%.

Bruce Steinberg, an economist at Merrill Lynch in New York, said the likelihood of the Fed raising interest rates before 1994 is "extremely remote."

However, David Jones, an economist at Aubrey G. Lanston & Co., is less optimistic. He agreed that the Fed will hold interest rates steady at today's meeting, but he said the central bank could well decide to begin pushing rates higher in late August or September.

By that time, Jones predicted, the economy will have bounced back to growth at an annual rate above 3%, as measured by the gross domestic product, and the higher growth will spawn renewed concerns about inflation.

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