Fed holding firm on interest rates Board said to be worried about inflation next year.

November 12, 1991|By Los Angeles Times

WASHINGTON B — WASHINGTON -- The Federal Reserve Board has virtually ruled out further interest rate reductions this year, despite the economy's persistent sluggishness, according to senior Fed officials.

Sources at the Fed said the board now doubts the ability of lower rates to fuel the economy, fears the resurgence of inflation next year and is wary of some potential long-term political ramifications of further interest rate reductions now.

The decision is certain to disappoint the White House, which has been counting on the Fed to cut interest rates and bail the country -- and President Bush -- out of the lingering slump before the 1992 election campaign begins in earnest.

With tax and budget policy virtually paralyzed by the record federal budget deficit, Congress and the Bush administration have been unable to push through spending programs or tax cuts that would invigorate the economy.

The president has decided against campaigning for a package of stimulative tax reductions at least until February.

As a result, the White House's economic policy has been reduced to little more than publicly urging the Fed to cut interest rates. Secretary of the Treasury Nicholas F. Brady and Bush's chief economic adviser, Michael Boskin, have both pushed hard for further reductions in the last few weeks.

Senior administration economic policy-makers would not comment yesterday on the Fed's decision.

At an internal policy meeting last week, highlighted by a lengthy and intense closed-door debate over the direction of the economy, Fed officials effectively agreed that, "even if

see a bad month or two, we will ride it out," without further cuts, one source said. The Fed will move again "only if things get bad for several months and really go into a free-fall."

Last week, the Fed lowered its benchmark discount rate by 0.5 percentage points to 4.5 percent, its lowest level in 18 years, and slashed its federal funds rate 0.25 percentage points to 4.75 percent. But Fed officials decided that "we have gone down just about as far as we can go," said one Fed source.

Sources said that the decision not to cuts rates further stems in part from a growing fear within the Federal Reserve about political pressures it will face from the White House during the upcoming presidential election.

At last week's policy session of the Fed's Open Market Committee, some officials warned that if they lowered rates more now, they might be forced to raise rates next year to hold down inflation -- if the long-awaited economic recovery gains momentum.

But raising rates in the middle of a presidential election would be extremely difficult. It would be much easier, Fed officials argued, to forgo another rate cut now, in hopes of delaying rate increases as long as possible during the expected recovery next year.

"There has been a lot of discussion, not just in the last meeting but in the last few meetings, about what happens when we have to raise rates again," one Fed source said. "That's one reason that has been talked about for not lowering rates [further] now, because it will be hard to raise them again next year."

The concerns underscored the Fed's deep-seated fears about a resurgence of inflation next year. Fed officials believe that there is a delay of three to six months between the time rate reductions are made and their effect on the economy is felt. Consequently, they fear that another move on interest rate policy now will hit the economy just as it is gaining momentum, leading to higher prices.

Officials acknowledged that the Fed might be forced to change course and move more aggressively if the economy deteriorates badly.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.