Wednesday, April 29, 1998

Too early to raise interest rates, analysts say

MARTIN CRUTSINGER / Associated Press

WASHINGTON -- The inflation-wary Federal Reserve may be starting to worry about inflation dangers down the road, but the Clinton administration's chief economic policy-maker said today the United States appeared headed for another year of solid growth and low inflation.

Treasury Secretary Robert Rubin maintained his long-held stance of not commenting directly on the central bank, but he said that he believed U.S. prospects were bright even with developments in Asia.

"Obviously the situation in Asia will result in a higher trade deficit than we would have otherwise had and that will be negative with respect to growth," Rubin told reporters at the Treasury Department. "On the other hand, it is also true that that contributes to lower inflation and lower interest rates in the market ... and that is a plus for the economy."

On balance, Rubin predicted, "The most likely scenario going forward is for the continuation of solid growth and low inflation with the normal ups and downs."

Rubin's remarks came as Wall Street shrugged off a bout of inflation jitters to recoup some of Monday's 147-point decline. At midday, the Dow Jones industrial average was up 23 points.

The market had been jolted Monday by a published reported in the Wall Street Journal that the central bank's rate-setting Federal Open Market Committee at its March 31 meeting had adopted a policy directive leaning toward a boost in interest rates if conditions warranted.

Since December, the Fed had been in a neutral stance, meaning the next move was just as likely to be a rate cut as a rate increase.

While the markets were roiled by fears of a rate hike, private economists continued to insist that a rate change is not imminent, especially given the fact that consumer prices so far this year have been barely rising, thanks to a big drop in energy costs.

"It would be very difficult politically for the Fed to raise interest rates now, with inflation so low," said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis.

In practical terms, the FOMC's operational directive has taken on less meaning since 1994, when the Fed began announcing rate actions at the conclusion of its meetings. However, financial markets still watch the directive language for early-warning signs of a possible change in central bank sentiment.

But many private economists said that an even better indicator of Fed thinking in recent years has been to listen to the public comments made by Chairman Alan Greenspan, who signaled that Fed rate increases were imminent in 1994 and again in 1997 with public comments well in advance of the Fed actions.

"It's significant that we haven't heard from Greenspan yet," said Lyle Gramley, a former Fed board member and now an economist with the Mortgage Bankers Association. "He does not like to move without preparing the market so that it is not shocked by a change in policy."

The Fed last changed rates in March 1997 when it nudged the federal funds rate, the interest that banks charge on overnight loans, up by one-quarter point.

Various Fed members have made comments in recent weeks about concerns the economy may now be growing too rapidly. But Greenspan has not deviated from remarks he made to Congress last month that the forces working on the U.S. economy were equally balanced between strong domestic demand and the threat that the Asian currency crisis would sharply cut into U.S. exports.

Greenspan and other policy-makers have been expecting the impact of the Asian currency crisis to slow the U.S. economy enough to make a rate increase unnecessary. But so far there are few signs that slowdown is occurring.

The government will issue its first look at overall growth on Thursday. The expectation is it will report that the economy's output of goods and services was rising at an annual rate of 3.4 percent in the first quarter of 1998, little changed from the 3.8 percent increase in the gross domestic product for all of 1997.

Analysts said another the Fed will also be watching Thursday's release of employment costs for the first quarter. The concern is that the tight labor markets -- unemployment has for the past year been at levels not seen in a generation -- will eventually start to exert upward pressures on wages and inflation.