Fed appears to leave rates unchanged

September 28, 1994|By New York Times News Service

WASHINGTON -- The Federal Reserve's committee on interest rates adjourned after a four-hour meeting yesterday without announcing any change in short-term interest rates.

But the consensus of economists was that the committee probably gave Federal Reserve Chairman Alan Greenspan considerable leeway to raise rates before the committee next meets on Nov. 15, particularly if government economic data issued in the next six weeks shows signs that inflation is rising.

Financial markets had mixed reactions. In New York, December gold futures surged $3.60 an ounce to $401.40, the highest close since June 21, amid perceptions that the central bank will step back from fighting inflation until after November elections.

The Dow Jones industrial average rose 13.80 points, to 3,863.04, while broad stock indexes ended mixed. Long-term interest rates edged up in the bond market as prices fell, with the yield on the 30-year Treasury bond ending at 7.84 percent.

The Fed issued only a brief statement after yesterday's meeting of the Federal Open Market Committee, which controls the interest rates that banks pay to borrow money overnight. "The FOMC meeting ended at 1 p.m.," the statement said. "There will be no further announcements."

A virtually identical statement followed the committee's meeting in early July. At that time the committee also chose to leave short-term interest rates unchanged, while giving Mr. Greenspan explicit permission to raise them in the ensuing weeks.

Mr. Greenspan did not do so, and the committee raised short-term interest rates by half a percentage point at its next meeting, on Aug. 16. Yesterday's meeting was the first one since then.

The central bank has repeatedly raised rates because of concerns that the pace of inflation, now slightly less than 3 percent a year, may soon accelerate.

Some members of the Open Market Committee fear higher inflation may lie in the future because the nation's factories are operating closer to full capacity than they have in five years, which could lead people to start bidding up the prices of scarce labor and materials.

Other members of the committee worry that the Fed may have supplied too much credit to the nation's banks last year, increasing the amount of money in circulation and allowing Americans to bid up the price of gold and commodities. Both methods of analysis have produced similar conclusions by Fed officials that interest rates should rise.

Those officials who look at whether factories are operating at full capacity -- a group that is believed to include Alan S. Blinder, the vice chairman, and possibly Mr. Greenspan -- may have looked at figures issued yesterday by the Conference Board, a research group supported by businesses, as evidence that the economy is not going to overheat soon.

The Conference Board announced that its figures showed consumer confidence fell for the third straight month, suggesting that consumers may not bid up prices on the limited output of factories any time soon. The board's index of consumer sentiment eased to 88.4 in September, down from 90.4 in August.

The increase in interest rates on Aug. 16 was the fifth this year. The increases have pushed up the federal funds rate, which banks pay each other for overnight loans, to 4.75 percent from 3 percent.

The Fed has also raised the discount rate, which banks pay to borrow money overnight from the Fed, by half a percentage point in May and in August. The two changes have increased the discount rate to 4 percent from 3 percent this year.

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