- The Washington Times - Thursday, November 16, 2000

The Federal Reserve yesterday said the economy is slowing and may even be entering a period of anemic growth, but the central bank will remain on alert against a rise in inflation caused by high energy prices and shortages of workers.

The statement, issued after a day-long meeting of the Fed's rate-setting committee, was the first to proclaim that the central bank is achieving the "soft landing" in the economy that it sought by raising interest rates nearly two percentage points between June 1999 and May 2000.

The heady days of growth exceeding 5 percent per year are over, and the Fed said the economy may even grow for a time below its potential, which economists estimate at around 3.3 percent per year. That suggests that the sluggish growth rate of 2.7 percent seen this summer may become more standard.

David Orr, chief economist with First Union Securities Inc., said the Fed is trying to send a comforting message to financial markets troubled by disappointing growth of corporate earnings and worried about the future as political parties continue to bicker over who will be the next president.

Overly exuberant spending by consumers and businesses had been one of the principal concerns that prompted the Fed to raise rates, and that concern has been addressed for now, he said. Reports of more subdued retail sales and industrial production in recent days confirm the trend.

The Fed's change of tone is remarkable, Mr. Orr said. "It has been years and years since the words 'softening' and 'easing' have escaped the Fed's lips."

The Fed might have gone even further to announce it is finished raising rates, were it not for its "desire to stay out of the political limelight at this sensitive time," he said.

Despite the Fed's apparent attempt to soothe the markets, stocks dropped after the announcement out of disappointment that the Fed did not signal an end to rate increases. The Dow Jones Industrial Average fell from a gain of 115 points into negative territory, but recovered to close up 27 at 10,708.

Economists said that while the Fed is pleased with slower growth, stubbornly high energy prices continue to force it to focus on the threat of inflation.

The price of natural gas, which is used to heat 70 percent of American homes, hit record highs as a cold spell set in this week. And the prices of crude and heating oil remain near 10-year highs.

Mr. Orr said the Fed's preoccupation with high energy prices is justified. While the higher costs have not been passed on in higher goods prices for the most part, they are causing prices for services such as transportation and electricity to rise. They also are prompting more companies to consider raising prices, he said.

Another concern of the Fed's shortages of workers was highlighted in a report from the National Federation of Independent Businesses yesterday. It found that nearly a quarter of small businesses are having trouble finding qualified workers, and a third cannot fill some job openings.

The labor shortage has prompted nearly a third of small businesses to increase wages and benefits to attract workers, the report said, and another 15 percent are raising their prices to offset the higher labor and energy costs.

Joel Naroff of Naroff Economic Advisers in Holland, Pa., said the cost pressures created by the labor crunch are a serious problem for the Fed.

"We are going to have to see at least several quarters of below potential growth that leads to some increase in the unemployment rate" before the Fed can rest, he said. If unemployment stays where it is around 4 percent, "the pressures on wages will not subside," he said.

The Fed noted another development that is cooling the economy: a "tightening" of conditions in the financial markets, which has made it more difficult for some businesses and consumers to get the money they need to invest and spend.

With delinquencies rising, many banks have become more cautious about lending, and borrowing rates for many businesses have gone up. Also, companies that could raise funds in the stock market easily just a year ago have been shut out since April by the downdraft, particularly in technology stocks.

Mr. Orr said the credit crunch being experienced by some businesses is not as serious as the one in 1998, when a "seizing up" of the financial markets in the wake of Russia's disastrous default prompted the Fed to dramatically cut rates in the United States.

Still, the statement signals that the Fed will remain especially alert to any possibility that small- and medium-sized businesses are losing access to credit, in what could become a warning sign of recession, he said.

The small business federation said that most of its members are not experiencing a credit crunch, with only 4 percent reporting difficulty in obtaining loans.

"Standards are higher, but firms look better every month and can still clear the hurdles" laid down by banks because of brimming revenues from the record economic expansion, said William Dunkelberg, chief economist of the federation.

Some large corporations say they have been put in a vise, however, by the combination of the credit squeeze, high energy prices, stiff competition that makes it impossible to raise prices and difficulties in selling goods overseas because of the strength of the dollar.

"The risk of a steeper slowdown over the next few months is more serious than the risk of a future rise in inflation, and the Fed should take this into account," said Jerry Jasinowski, president of the National Association of Manufacturers.

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