Fed leaves rates unchanged, but the lull may not last long

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June 28, 2000 — Alan Greenspan’s call? “Time Out!”

Federal Reserve Board Chairman and his fellow policymakers decided to leave interest rates unchanged at the conclusion of their two-day meeting June 27 and 28. The primary interest rate the Fed controls, the federal funds rate, will remain at 6.5 percent for the time being as a result. The discount rate will stay at 6 percent, too.

After hiking rates at six of the last eight meetings, officials sat tight this time around. They held off because several recent reports suggested the economy cooled in late spring.

“Recent data suggest that the expansion of aggregate demand may be moderating toward a pace closer to the rate of growth of the economy’s potential to produce,” said
the post-meeting statement released by the Fed’s rate-setting group, the
Federal Open Market Committee. “Although core measures of prices are rising slightly faster than a year ago, continuing rapid advances in productivity have been containing costs and holding down underlying price pressures.”

Nevertheless, most Fed-watchers think the game isn’t over yet and that more rate increases await consumers later this year. The FOMC’s own language seems to confirm that outlook, too.

Consider that officials can round out their post-meeting statements with one of three sentences. Those sentences indicate whether inflation is likely to be a problem, isn’t likely to be a problem or it’s too early to tell. This time around, FOMC members picked the most cautious of the three. That means another rate hike could come as early as the group’s next meeting on Aug. 22.

“Against the background of its long-term goals of price stability and sustainable economic growth and of the information currently available, the Committee believes the risks continue to be weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future,” the Fed statement said.

Experts say Fed caution stems from uncertainty about the economic slowdown of April and May. FOMC officials — and most market watchers on Wall Street, for that matter — can’t seem to decide whether it was just a blip or the start of a longer-term trend toward slower growth.

Yes, job creation, manufacturing activity and consumer spending all showed signs of cooling this spring. That coincided with a stock market plunge and the first 50-basis point rate hike since February 1995. But experts point out that the same thing happened in the second quarter of last year and 1998. In both of those years, growth had rebounded by Christmas.

If the economy does accelerate again, Fed officials will likely fire off even more rate increases before the year is out. Most forecasters see the fed funds rate climbing to at least 7 percent by 2001 thanks to increases in August and in at least one of the last three meetings of the year, scheduled for Oct. 3, Nov. 15 and Dec. 19. That would push the Wall Street Journal prime rate into the double digits for the first time in more than nine and a half years.

“Chances are the trend in growth is still relatively strong,” says Jim O’Sullivan, U.S. economist with
J.P. Morgan & Co.
in New York. “Our own call is that the economy is not slowing as much as some of the recent numbers would imply and if the numbers bounce back, the Fed will be tightening again by August.”