- The Washington Times - Wednesday, October 4, 2000

The Federal Reserve, while declining to raise interest rates, for the first time yesterday cited high energy prices as an inflation threat that could justify rate increases in the future.

Elevated energy prices could raise "inflation expectations," even though their impact on prices outside of energy so far has been "limited," the central bank said in a statement.

The Fed's surprise statement on energy caused an immediate drop in the financial markets. The Nasdaq Composite Index wiped out a 1.4 percent gain immediately after the Fed's mid-afternoon announcement and ended down 113 points at 3,456, its biggest loss in two months, as traders braced for the possibility of more rate increases.

The Dow Jones Industrial Average, which had been up more than 140 points before the Fed move, pared its gains and closed up 20 points at 10,720.

Many on Wall Street had hoped the Fed would signal that it was finished raising rates and might even consider cutting rates next year if the economic slowdown is too severe.

The Fed's statement noted that economic growth appears to be moderating and strong gains in productivity are offsetting higher costs for energy, labor and other items. But the central bank said it must remain on alert because the threat of higher inflation remains substantial.

The Fed's 12-member rate-setting committee "is taking the oil-price threat more seriously than many observers had been," said Joel Naroff of Naroff Economic Advisers in Holland, Pa., calling it "a new element in the mix" for Wall Street.

"It should not be assumed that the Fed is done raising rates," he said, though yesterday's daylong meeting of the rate-setting committee is the third at which the central bank decided not to add to its nearly 2 percentage point increase in short-term interest rates since June 1999.

The Fed was careful to say that high energy prices are a threat not because they are prompting businesses to immediately raise their prices, but because they "create the impression that inflation will rise," he said. "Expectations do matter and oil could affect expectations."

The Fed signaled with yesterday's announcement that it not only wants to see a slowdown of economic growth, but it would like to see a drop in oil and other energy prices before it rests, Mr. Naroff said.

Many economists believe the principal result of this year's jump in crude-oil prices will be a slowdown in consumer spending, since consumers are likely to cut back in other areas to offset the high prices they are paying for gasoline, electricity and heating.

Economists also point out that while some energy-intensive businesses are following the lead of the airlines and raising prices, most others have refrained from passing on their increased fuel costs. Instead, they are absorbing the higher energy costs and posting lower profits adding to the woes in the stock market.

Companies are diverse as Dupont and Wal-Mart have been caught in the pinch, with Wal-Mart predicting slower consumer spending and Dupont warning of lower profits.

"Energy-price increases could well reduce consumer spending and force industry to cut costs," said Jerry Jasinowski, president of the National Association of Manufacturers. "The last thing the economy needs is another rate increase."

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