- The Washington Times - Thursday, June 29, 2000

The Federal Reserve, citing a "tentative" slowdown in the economy, yesterday decided against raising interest rates, but said it will remain vigilant this summer because inflation pressures are still on the rise.

Growth appears to be moderating to about half the sizzling 7 percent pace set at the end of last year a much more comfortable speed for the economy that is less likely to ignite inflation, the central bank noted in a statement after a two-day meeting of its rate-setting committee.

But the labor market remains drum tight and prices for everyday things that consumers need are starting to creep up, despite the efficiencies created by new technologies that are helping to hold inflation down, the Fed said.

While the central bank appeared satisfied that its six rate increases totaling 1.75 percentage points in the last year are starting to slow the speeding economy, analysts said the central bank still may not be finished raising rates and faces important challenges ahead.

"It only made sense to pass" at yesterday's meeting, said Joel Naroff of Naroff Economic Advisers in Holland, Pa. "But that does not mean the Fed is done" because the slowing may be only temporary, he said.

Reports showing that spending on autos and other retail goods plummeted from a 13 percent pace in the winter quarter to almost zero in the spring quarter offered a convincing reason for Fed officials to pause and wait for more evidence to gauge the extent of the slowdown, he said.

Reports showing the rates of economic growth and inflation during the spring and early summer will come out in the next six weeks before the Fed's August meeting. Economists note that in previous years, consumers have taken a breather in the spring, only to flock back to the malls in the summer.

Already signs are emerging, Mr. Naroff said, that the economy still has lots of spunk and may accelerate again after a spring pause. He cited a report out yesterday showing a 6 percent jump in orders for big-ticket durable goods last month.

"The situation the Fed faces now is the most threatening in a decade," he said. "If the economy slows only moderately or for a relatively short period of time," that won't be enough to ease inflation pressures.

"The Fed might have to start a new round of rate hikes with little time to spare," sharply raising rates from levels that already are the highest in nearly a decade, he said. "We could wind up with … a serious recession."

Some economists were optimistic that the Fed is finished raising rates because the slowdown will prove to be deep and lasting.

"There's a good chance they are done for the year, and this is not just a temporary pause," said Lynn Reaser, chief economist with Bank of America Asset Management in St. Louis.

Sales of interest-sensitive items like homes and cars are down significantly, she said, and other forces are starting to dampen spending, like the jump in gasoline prices in the last month and the more subdued stock market.

Consumer confidence dropped sharply from record levels last month in response to gas prices that have soared to over $2 a gallon in the Midwest. With more money coming out of family pocketbooks to gas up the car, that means less money will be spent on other things, Miss Reaser said.

The gasoline-price increases are unlikely to touch off a round of higher inflation, she said, because businesses will be unable to pass on the energy-price increases as business conditions cool down in response to the Fed rate increases.

The Fed's apparent strategy of preventing another outbreak of irrational exuberance in the stock market by keeping investors guessing about its next move appeared to be working yesterday.

Soaring stock gains in the past have stoked consumer confidence and spending, but with Wall Street analysts sharply divided on the Fed's next move, the market has been mixed and has moved mostly sideways. Stocks rallied moderately after the Fed announcement yesterday.

Business and labor groups applauded the Fed's decision not to raise rates. Leading Democrats in the House had warned last week that any attempt to force up interest rates and unemployment just before the elections would become a political issue.

Jerry Jasinowski, president of the National Association of Manufacturers, said the Fed was wise to recognize that the economy already is responding to its previous rate increases.

"Energy-price hikes have not set off more widespread increases in wages and prices as they did in the 1970s," when inflationary pressures were much stronger than today, he said. "In addition, we use about 40 percent less energy per dollar of [economic output] than we did 10 years ago."

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