Wednesday, May 20, 1998

Fed makes no change in interest rates

By DAVE SKIDMORE Associated Press

WASHINGTON -- The Federal Reserve today opted to hold short-term interest rates unchanged, choosing the safest course in the face of continued political and economic turmoil in Asia.

The central bank's monetary policy panel -- the Federal Open Market Committee -- concluded a 4-1/2-hour private meeting by leaving the benchmark rate on overnight loans at 5.5 percent.

It's been at that level since March 1997, when policy-makers nudged it a quarter percentage point higher, expressing concern that the strong economic demand at the time would result in increased inflation.

The economy's robust growth has continued through the first first quarter, when the gross domestic product advanced at a rapid 4.2 percent annual rate. But, at the same time, analysts anticipate that spillover from Asia's economic troubles will slow the U.S. economy, relieving any inflationary pressures that might be building.

Moreover, any increase in U.S. interests rates -- by increasing the attractiveness of dollar-denominated investments -- at this time risks increasing the flow of money out of Asia and putting more strain on its corporations and banks.

Today's decision was widely anticipated and financial markets showed little reaction. The stock market rose this morning in anticipation of no change in rates.

Bolstering the case for no change in rates has been the extraordinary tameness of inflation. Through the first four months of the year, consumer prices have risen at a scant annual rate of 0.9 percent.

Plus, there have been signs of moderation in the U.S. economy, particularly in manufacturing industries dependent on exports to Asia. Even the red-hot housing market has plateaued.

Separately, the Commerce Department said construction of new housing units slid slightly for the second consecutive month, down 2.3 percent to an annual rate of 1.54 million units in April.

"For the Fed, the best policy is no change," said economist Everett M. Ehrlich of ESC Co.

Last month, the stock market was roiled by a report in The Wall Street Journal that central bank officials had voted March 31 to stand ready to raise short-term rates. Adding to the markets' edginess were comments from some committee members, led by board member Laurence H. Meyer, indicating concern the economy was growing too fast and could trigger an inflation outbreak.

However, Federal Reserve Chairman Alan Greenspan hasn't made any public comments indicating he's changed his opinion -- delivered to Congress in February -- that strong domestic demand and the impact of Asian currency crises on U.S. export sales are about in equal balance.

Usually, Greenspan drops broad public hints of coming actions. Since he hasn't this time, analysts assumed the Fed wasn't quite ready to act on the bias policy-makers adopted at their last meeting.

But, nearly all economists assume an increase is coming, sooner or later. Thanks to the lowest unemployment rate in 28 years, wages are rising about 2 percentage points more quickly than prices. Unless businesses can make up for that through improved efficiency, they'll come under increasing pressure to pass on the additional costs in the form of higher prices to customers.

"I don't think the Fed can wait indefinitely for the economy to slow down. The first quarter was very strong and the second quarter, I think, will be strong, too," said economist Sung Won Sohn of Norwest Corp. in Minneapolis. "That's not acceptable, given our labor market constraints."