By
The Associated Press
WASHINGTON - The Federal Reserve, citing strong productivity growth and a moderating economy, decided yesterday against boosting interest rates for a seventh time in its campaign to fight inflation.
While still warning about the dangers that tight labor markets might spark inflation, Federal Reserve Chairman Alan Greenspan and his colleagues included more upbeat language about the economy in explaining their latest decision. It marked the second meeting at which the central bank has left rates alone.
The more positive tone led some analysts to predict that the Fed was close to declaring a cease-fire in its drive to push interest rates higher in order to slow economic growth and keep inflation in check.
But other analysts said they still expected at least one more rate hike, probably after the Nov. 7 election. No economists predicted a rate boost at the Oct. 3 meeting, citing the Fed's longstanding preference to remain on the sidelines if at all possible in the closing weeks of a presidential campaign.
"I think conditions will allow them to wait until after the election before they consider another rate hike," said David Jones, chief economist at Aubrey G. Lanston & Co. in New York. "But I think there is a good chance of one more hike at either the November or December meeting."
Financial markets, which had widely anticipated the Fed's decision to leave rates alone, had little reaction to the mid-afternoon announcement. The Dow Jones industrial average finished the day up 59.34 at 11,139.14.
Over the past 14 months, the Fed has raised rates six times, pushing its target for the federal funds rate, the interest that banks charge on loans to each other, up to 6.5 percent, including a half-point increase on May 16.
Those increases have raised the borrowing costs for millions of Americans with banks' prime lending rate, a benchmark rate for many consumer and business loans, now at a nine-year high of 9.5 percent.
The prime rate stood at 7.75 percent before the Fed began its drive to push rates higher in June 1999.
The decision yesterday marked the second meeting that the Fed has passed up the chance to raise rates for a seventh time.
Economists said the tone of yesterday's four-paragraph statement explaining its actions was much more positive than the statement issued on June 28.
"Recent data have indicated that the expansion of aggregate demand is moderating toward a pace closer to the rate of growth of the economy's potential to produce," the Fed said yesterday.
In June, the central bank had only said that the expansion "may" be moderating and said signs of a slowdown were still "tentative and preliminary."
In the new statement, the Fed also said that "rapid advances in productivity have been raising the potential growth rate" of the economy, a bullish statement missing from the June statement.
Various economists cited these more positive comments to bolster their positions that the Fed has finished raising rates.
"We believe the Fed is done," said Bruce Steinberg, chief economist at Merrill Lynch in New York.
"We expect growth to remain within the Fed's 4 percent speed limit and inflation to be tame."
Steinberg said the economic growth in the April-June quarter was likely to be revised up Friday to a sizzling 6 percent, far above the 4.8 percent growth of the first quarter. But he said all indications are that growth in the final six months of this year will be in the 3.5 percent to 4 percent range.
However, other economists expressed concerns that the Fed is likely to remain on inflation-alert given that the nation's unemployment rate remains near a 30-year low at 4 percent.
These analysts noted the Fed's statement said the central bank "remains concerned" about the threat that tight labor markets still posed as an inflation risk.
"By November or early next year, the Fed could easily decide they need another move as insurance if the economy isn't slowing down or if inflation is picking up a bit," said William Cheney, chief economist at John Hancock in Boston.
Business groups, which have been warning that the Fed was in danger of risking the current record-long expansion with higher rates, expressed pleasure with the Fed's stand-pat decision.
"We have not yet seen all the effects from the past six rate increases and so it is imperative that the Fed continues its wait-and-see policy over the next several months," said Martin Regalia, chief economist at the U.S. Chamber of Commerce.
Jerry Jasinowski, president of the National Association of Manufacturers, praised the Fed's judgment.
"The Fed's decision not to raise rates shows that Chairman Greenspan and his colleagues are mindful of the moderate cooling trend we've been witnessing and are acting accordingly,"he said.
