Fed deemed unlikely to raise rates Open Market panel set to meet today

July 06, 1993|By New York Times News Service

NEW YORK -- After nine months of predicting changes in Federal Reserve monetary policy that never occurred, investors and traders in the credit markets expect today's meeting of the Federal Open Market Committee will result in an agreement by Fed officials to hold short-term rates stable.

A decision by the committee to maintain rates would modify its assessment in May, when Fed officials voted to hold rates stable for the immediate future but hinted strongly at their willingness to raise rates if inflation worsened. Explanations of any shift may be forthcoming next Tuesday, when Fed Chairman Alan Greenspan is scheduled to present the central bank's views on the economy and monetary policy to Congress.

Mr. Greenspan's testimony, which is required twice a year, is likely to include something for everybody.

Bond investors will be assured that the Fed wants low inflation and will stand ready to raise interest rates if that goal is threatened. Congress, meanwhile, will be assured that the Fed will do all it can to keep the economy growing by maintaining low interest rates.

It is a familiar tightrope for Mr. Greenspan, but one that may be fraught with more than the usual difficulty. Because the budget package now being negotiated in Congress promises a combination of higher taxes and reduced spending that can dampen economic growth, many in the credit markets wonder how much pressure the Fed may feel to compensate and help the economy by keeping interest rates low or perhaps even by pushing them lower.

"With the budget package, we now have an economic policy that is good for the bond market, but bad for the economy," said Charles Smith, a bond manager at T. Rowe Price, a Baltimore-based mutual fund company.

While he expects the economy to suffer from the tax package, he does not expect the Fed to try a pre-emptive strike. "I expect they will take a neutral posture and wait to see more data," he said.

Some analysts conclude that no change by the Fed is likely because its policy has been working so well. Banks and businesses are awash in cash, so reducing short-term rates from levels that are already the lowest in 30 years would not appear to provide much additional benefit.

With Treasury bond yields dropping to a 20-year low of about 6.66 percent last week from 7.75 percent in November, Fed officials might feel unwilling to change a policy that appears to be convincing investors that inflation will remain benign.

"If Greenspan came to Congress, declared a victory over inflation and lowered interest rates, it would surely be popular with Congress and maybe even some parts of Wall Street," said Irwin L. Kellner, chief economist at Chemical Bank.

But there is no assurance that the inflation-wary bond market would follow the Fed's lead to lower interest rates, he said.

Raising interest rates -- or strongly hinting they would be raised -- is unlikely, analysts said, because the June data due this week are expected to show a continuation of the low inflation reported for May and because the economy remains sluggish.

Last week's weak economic data, culminating in a report showing a meager rise of 13,000 jobs on payrolls in June, have led many economists to reduce their forecasts for second-quarter growth after inflation to 2 percent or less.

Mr. Kellner at Chemical Bank noted that if the Fed adjusted its policy to allow higher interest rates as the economy grows and credit demands increase, "it would be a quite normal development in the economy and would not choke off future growth." But an attempt by Mr. Greenspan to deliver that message is dangerous, he said, "because the Fed is working with a populist president and some members of Congress who would dearly love to curb the Fed's independence."

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