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Fed Stands Pat on Rates, Bias to Tighten

Economy: Policymakers give no indication they will reduce borrowing costs in near future. Decision disappoints investors.

November 16, 2000|PETER G. GOSSELIN | TIMES STAFF WRITER

WASHINGTON — Federal Reserve policymakers decided to leave the nation's borrowing costs unchanged Wednesday, dismissing worries that the economy may be slowing too quickly.

The central bank's policymaking body, the Federal Open Market Committee, refused to even hint when it might reverse course and start lowering interest rates. That decision disappointed investors, who had hoped for some good news after weeks of roiled markets and election uncertainty.

The Fed panel left the so-called federal funds rate, the rate at which banks make short-term loans to each other, at 6.5%, where it has been since May. And it issued a news release warning that it "continues to see a risk of heightened inflation pressures."

"The message is we've been too optimistic," said Sung Won Sohn, chief economist with Wells Fargo & Co. in Minneapolis. "We should discard any notion of a rate cut any time soon."

Almost no one had expected the Fed to cut rates Wednesday. But some analysts had thought that recent signs of economic slowing might be enough to tip the balance--the Fed's stated "bias"--in favor of cuts perhaps next month or early next year.

The government said three weeks ago that the economy grew at a 2.7% annual pace in the July-September quarter, less than half the 5.6% pace of the previous quarter, and its slowest rate since the middle of last year. Government scorekeepers said Wednesday that the nation's industrial production slipped one-tenth of a percentage point last month, driven in large part by a sharp drop in auto manufacturing.

In their news release, Fed officials noted the slowing, saying "softening in business and household demand and tightening conditions in financial markets over recent months suggest that the economy could expand" at a less feverish pace than it has in recent years.

But the officials added that "the easing of demand pressures has not been sufficient to warrant" changing their minds that the bigger risk is still too much growth--and the accompanying danger of renewed inflation--rather than too little.

Those words were enough to cool the fervor investors were showing in the minutes leading up to the Fed decision. The Dow Jones industrial average, which climbed more than 118 points in anticipation of a central bank signal about rate cuts, plunged before crawling back to gain 26.54 points, or 0.3%, and close at 10,707.60.

Other major market measures followed a similar pattern. The Nasdaq composite index, which jumped more than 70 points, dropped into negative terrain before closing up 27.22 points, or 0.9%, at 3165.49. The Standard & Poor's 500-stock index rose, fell and rose again, ending up 7.04 points, or 0.5%, at 1389.99.

The 10-year Treasury bond rose one-quarter of a point, pushing down its yield or market interest rate three basis points, to 5.72%.

"The financial markets were engaged in some wishful thinking," said Nicholas S. Perna, an economic consultant. "Having been beaten up in recent weeks, they wanted good news, but didn't get it."

Fed policymakers had more reasons for standing pat than mixed signals from the economy. Analysts said they wanted to avoid adding anything new to the confusion engulfing the country because of last week's still-undecided presidential election.

Both candidates cited the economy in their campaigns, Democrat Al Gore saying it was in fine shape and Republican George W. Bush countering it was stumbling. The central bank did not want to be seen as choosing between the views.

In addition, some analysts said, policymakers wanted to avoid the perception the Fed was seeking to protect the economy and the markets from the uncertainty of the election outcome.

"They didn't want to be seen as responding to the vagaries of the vote count in Florida," Perna said.

The Fed raised the fed funds rate a total of 1.75 percentage points in six small steps between the middle of last year and May, saying it needed to slow growth to a more sustainable pace in order to avoid a resurgence of inflation. Since May, policymakers have met four times without changing the rate.

A higher funds rate raises the interest Americans must pay to finance a home, buy a car or make a credit card purchase, and, over time, slows consumption and economic growth.

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