- The Washington Times - Thursday, August 17, 2000

The Federal Reserve most likely will refrain from raising interest rates again before the elections. Tame inflation and a modest slowing of the economy give it the luxury of waiting, analysts say.

The Fed may be achieving its goal of engineering a "soft landing" for the economy, many analysts say, citing an easing of job growth and a falloff in sales of homes and automobiles during the spring from their red-hot growth rates last winter.

The central bank's rate-setting committee meets on Tuesday to decide whether to raise rates for a seventh time since June 1999. Almost no forecasters on Wall Street or Main Street are predicting it will.

Reports out yesterday confirmed the view that growth is cooling. New start-ups by home builders fell an unexpectedly large 3.3 percent last month, the Commerce Department said, while the Labor Department reported that consumer prices edged up a muted 0.2 percent.

"Most sectors of the economy are showing signs of weakening, particularly the interest-sensitive housing sector," said David Lereah, chief economist of the National Association of Realtors.

"Overall, the three major measures housing starts, existing-home sales and new-home sales are down about 5 percent from their peak in 1999," he said. "Combined with relatively tame inflation numbers, the evidence suggests the Fed will leave interest rates alone."

The cooling of the real estate market causes consumers to spend less on furniture, appliances, hardware and other "fix-up" items, economists say.

But some say the slowdown may be only temporary. Indeed, retail sales reports showed consumers flocked back to the malls in July after a spring lull, and particularly splurged on home furnishings and building materials.

But even those who question whether the slowdown is lasting say the Fed will only know for sure by watching and waiting as reports come out in the next few weeks in hopes they may shed more light on the economy's performance.

Moreover, Fed-watchers say the central bank prefers not to act during the election season, when politicians in the heat of campaigning are prone to seize upon its moves and attack them.

Fed Chairman Alan Greenspan, in his appearance before Congress in July, argued that the slowdown should prove sustainable. He pointed to rising household debt burdens, made heavier by rising interest rates, and contended that after years of bingeing on cars and other big-ticket items, consumers should be close to satiated.

Mr. Greenspan noted that the stock market has been moving sideways since this spring, and is no longer stoking soaring consumer confidence and big spending plans as it did during its years of double-digit growth.

The Fed chairman also argued that the increase in oil prices this year is acting like a tax on spending as consumers divert more disposable income into higher gasoline and heating bills.

Oil prices have fluctuated wildly in recent months. Just yesterday, the price of crude oil was hovering near its record high of $32 in New York, but gasoline prices had eased off their record highs of more than $2 a gallon in some parts of the country with the replenishment of depleted inventories.

High energy prices are the principal reason the inflation rate has nearly doubled to 3.5 percent in the past year. Other than fuel and energy-intensive sectors such as transportation, plastics and aluminum, prices have remained subdued, analysts say.

With the economy largely shrugging off skyrocketing oil prices that in past years have caused an outburst of inflation and other damage, some economists argue that the Fed is dealing with a "new economy" and can rest after slowing growth only modestly to around 4 percent.

"The Fed's interest-rate policy is likely to remain on hold indefinitely," said L. Douglas Lee of Economics from Washington Inc., a District-based financial-forecasting firm. "A slowdown is well under way."

Mr. Lee says the Fed can tolerate higher growth and lower unemployment because of a marked pickup in productivity that is enabling businesses to produce more using fewer workers.

But others remain skeptical. John H. Makin, economist with the American Enterprise Institute, notes that growth has moderated during the spring quarter in each of the past three years. But the slowdown proved illusory because consumers later came back with a vengeance.

This year's slowdown has been hardly perceptible, he said, and when growth rebounds, it will push already-elevated inflation considerably higher.

"Markets are now hoping that … the Fed will be stuck on hold in this election year until mid-November," he said. "The larger reality is that the longer the Fed waits to raise rates, the higher they ultimately will have to go."

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