No move by Fed expected on rates Increase may come at August meeting if growth continues

July 02, 1996|By Jay Hancock | Jay Hancock,SUN STAFF

Although Fed rate setters are worried about the possibility of inflation and economic boil-over, many analysts believe that they will leave the country's economic thermostat untouched in meetings today and tomorrow.

Instead, they're expected to pore over forthcoming statistics and to raise short-term interest rates at their next meeting, in August, if the figures show continued signs of heat.

"I think they want to see more numbers," said Robert Sweet, chief economist for the financial management division of First National Bank of Maryland. "I don't think they're going to make any move" this week. "But any more strength that is exhibited in July will move the Fed to tighten in its Aug. 20 meeting."

The Fed's Open Market Committee controls the nation's money supply by buying and selling debt securities, shifting short-term interest rates in the process. It raises rates to crimp the money supply and slow the economy; lowers them when it wants to expand.

Many analysts believe that the economy is growing these days at a 3.5 percent annual rate. That's much faster than last year's 2 percent growth and well into the zone in which the Fed starts to worry that inflation will become a problem.

But glimmering portents of economic weakness have probably convinced the Fed that it can bide its time, several economists said.

Long-term interest rates have risen in recent months, and that will slow construction and home sales in the second half of the year, said Maureen Allyn, chief economist for Scudder, Stevens & Clark Inc. in New York. At the same time, consumer bankruptcies continue to soar, suggesting that banks are overextending credit and that the puff in retail sales in the year's first half may not last.

"Growth will slow down in the second half," she said.

New data released yesterday continued the equivocal theme of recent economic statistics.

The factory sector perked up in June, as the National Association of Purchasing Management's index rose to 54.3 percent from 49.3 percent in May. A reading above 50 indicates growth in manufacturing. And the Commerce Department confirmed earlier reports of strong May retail sales, disclosing that consumer spending rose 0.8 percent for the month, the best increase since February.

But construction spending fell by 0.9 percent in May, the victim of mortgage rates that soared past 8 percent.

The economy's spurt this year comes after the Fed lowered the federal funds rate, which banks charge each other for overnight loans, from a high of 6 percent last year to 5.25 percent in January.

Wall Street seems to share the expectation of a Fed freeze this week. Both long- and short-term interest rates have declined in the debt markets recently.

"The market seems to have decided that they're not going to do anything," said Nathan Sax, a fixed-income portfolio manager for Mercantile Bankshares Corp. in Baltimore.

The Fed will pay especially close attention to this Friday's employment report from the Labor Department, analysts said. If businesses created much more than 150,000 jobs last month, the central bank will interpret that as economic strength and raise rates in August, Sweet said.

The political atmosphere will be a bit different in the Open Market Committee today. Alan Greenspan was recently reappointed as Fed chairman, confirming his post at the helm for several more years. And former White House budget director Alice Rivlin and St. Louis economist Laurence H. Meyer have both joined the 12-person committee, giving it its first full roster in months.

Pub Date: 7/02/96


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