- The Washington Times - Wednesday, December 22, 1999

The Federal Reserve, signaling a heightened state of alert ahead of the coming new year, said it will leave interest rates where they are for the next few weeks to "ensure a smooth transition into the year 2000."

But the powerful central bank also expressed uneasiness about the frenzied pace of economic growth and consumer spending as the century winds down. In a statement after a daylong meeting of its rate-setting committee, the Fed hinted that it might raise rates if the calendar change to 2000 proves uneventful.

The two-sided statement containing both a reprieve and a warning brought a mixed reaction in the financial markets. Stocks staged a celebration as the Fed signaled at least a temporary pause in raising rates. The Nasdaq composite index, which is heavy with technology stocks and already had risen more than 70 percent this year, leaped a record 127 points to a new high of 3,911.

But market interest rates rose in anticipation of a possible fourth rate increase by the Fed soon if the feared year-2000 computer disruptions don't materialize.

"If it were not for the immediacy of Y2K, the Fed would have moved today," said Joel Naroff of Naroff Economic Advisers in Holland, Pa. With growth running close to a 6 percent annual rate spurred by record Christmas sales, "the monetary authorities believe that growth is too strong," he said.

The Fed gave investors and consumers a "clear and unambiguous warning," Mr. Naroff said, when it noted that the demand for goods and services in the United States continues to outstrip the ability of businesses to supply them.

"Such trends could foster inflationary imbalances that would undermine the economy's exemplary performance," the Fed said in its statement.

"I really believe if we get to the last week of January and planes haven't fallen from the sky, financial markets not only domestically but abroad are not disrupted and everything is doing well, the Fed will come out double-barreled" with a rate hike, said Richard Yamarone, analyst with Argus Research Corp. in New York.

In an embarrassing turn of events for the central bank, the Fed's three rate increases in the second half of this year so far have failed to produce any broad slowdown in the economy. In fact, growth has accelerated since the Fed started its inflation-fighting campaign, he said.

"Their first three shots turned out to be blanks," Mr. Yamarone said.

"They are beside themselves. They are gravely concerned about growth arguably doubling" the rate the Fed believes the economy can expand without generating inflation, Mr. Yamarone said.

The Fed's decision to remain in neutral until after the new year reflected not so much overarching concern that the economy could be thrown into a tailspin by a chain reaction of work stoppages caused by the computer bug fear, he said.

Rather, it was "a clever maneuver" by the Fed to deflect blame from the central bank itself, should disruptions occur in the financial markets early next year, he said.

Fed Chairman Alan Greenspan may be particularly anxious to avoid creating problems just ahead of the presidential elections, Mr. Yamarone said, since the chairman surely remembers how former President George Bush blamed him for engineering the recession that helped derail his 1992 re-election bid.

"Greenspan doesn't want that as a legacy," Mr. Yamarone said, adding that the Fed chairman also is mindful that his term expires in June and right now President Clinton is weighing whether to reappoint him.

Sung Won Sohn, economist at Wells Fargo in Minneapolis, said the Fed will raise rates two or three more times in the first half of the year to slow the economy, but it will have to watch its timing because of the increasing intensity of the political campaigns.

"The Fed has a narrow window to boost rates between the end of the Y2K season and the beginning of the presidential election season," he said.

However political or temporary the pause in the Fed's rate-raising campaign may be, the stock market took heart from it.

The Nasdaq yesterday ended 78.4 percent above its starting point this year and is poised to make 1999 a stellar year for the history books. The Dow Jones Industrial Average also is basking in a year-end rally that has raised it 22 percent so far this year.

With the Fed on the sidelines for now, analysts see few obstacles to the stock market's steep ascent.

"It's up, up and away, with technology leading," said John Davidson, chief investment officer at Orbitex Management Inc.

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