So, will the Fed tighten this week? Experts think it will, by just a tad

The Outlook

September 22, 1996|By Jay Hancock

ONCE UPON a time, to try to forecast Federal Reserve action, all you had to do was track the economic indicators and think like a central banker. It's not that easy anymore. Now you have to divine which of the Fed governors is leaking what information to whom. And why.

Last week Reuters quoted an unidentified Fed official as saying that eight of the 12 regional Fed banks had asked for a slight tightening of the money supply from Fed policy-makers when they meet this week and for a commensurate increase in short-term interest rates.

Some analysts said the unusually detailed leak was old news and eclipsed by subsequent events.

Some think the Fed sprinkled the information purposefully to Reuters to quell a too-perky bond market.

And some consider the leak to have been hot news and the Fed's subsequent public chagrin to be genuine.

So, tea leaves having been interpreted, what will the Fed's Open Market Committee do when it meets Tuesday?

Christine Chmura

Chief economist, Crestar Financial Corp.

I think it's highly likely that we'll end up seeing a 25-basis-point (one-fourth percentage point) increase in the Fed funds rate. The economy is slowing down. But the unemployment rate has been low enough for a long enough period that it appears that the tightness in the labor market is going to lead to wage increases and increases in inflation unless the Fed tightens.

Building wage pressures would be the reason for the increase.

Average hourly earnings in August were up 3.6 percent from a year ago, and it had been running around 3 percent for quite a while. Now that's just wages. When you include benefits, total compensation is staying more stable, but there's a greater lag with that data. We've only seen the second quarter.

Clearly, the anecdotal information has continued to suggest that wage pressures are building. And when the Fed acts now, it takes about a year before it impacts the economy. Their job is more difficult than taking a look at the numbers now and seeing what they portray. Their job is to discern the underlying trend.

Robert Sweet

Chief economist, Allied Investment Advisors

The way I look at it, they should increase by about 25 basis points. The economic numbers that have been coming, quite frankly, make me feel like I'm watching a tennis match. You've got positive numbers on one side of the court and negative numbers on the other side. Back and forth.

But the last significant number was housing starts, and that came in stronger than expected.

That, I think, is going to lean the Fed toward an insurance move of 25 basis points this time around. If those housing numbers weren't so positive, they probably would wait until November.

Nathan Sax

Trust division vice president, Mercantile-Safe Deposit & Trust Co.

The majority view is for a tightening sometime between now and November, with the minority view being that they won't tighten at all. The thinking there is that the election plays a part, that the Fed would not move until after the election. We're seeing a pretty strong economy, but we're not seeing inflation. Any tightening would be based on anticipation of inflation, although the evidence just isn't there.

The big worries by some people about future inflation include pretty tight labor markets.

People who are on the hawkish side say you can't wait for inflation to appear, you have to move against it beforehand.

And there definitely is still a fear in the bond market that inflation is around.

The (Treasury) market seems to have priced in a Fed increase close to a quarter -- maybe a little bit over a quarter -- of a point.

James Annable

Chief economist, First Chicago NBD

A 25-basis-point increase has about the same odds as the Cleveland Indians getting into the playoffs. The Fed has been telling us this. They have perceived a very small but real increase in wages, which has given them pause. You combine that with the sharp drop in the unemployment rate to 5.1 percent, and those were sufficient to push the Fed to tighten.

They're betting that the economy will slow, but they don't want to be wrong, have economic growth continue to be high, have unemployment go down -- and they didn't do anything. It would be wiser for them to do something now to show that they're not asleep at the switch.

But their fervent desire is that we will interpret it, and that the press will interpret it, as an isolated move.

They worry about its impact on the financial markets. They don't want to generate a big retreat in the stock market, but on the other hand they don't want to be wrong on the economy.

So if they tighten by 25 basis points, they've covered their risk. That's how the Fed makes monetary policy.

Pub Date: 9/22/96

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