Reflecting concern with tumult, the Fed elects not to tighten Overnight bank rate is left unchanged

November 13, 1997|By BLOOMBERG NEWS

WASHINGTON -- Federal Reserve policy-makers yesterday left unchanged the overnight bank lending rate -- a sign that tumult in world financial markets outweighs central bank concerns that the U.S. economy may be growing fast enough to spark accelerating inflation.

In a move that sent stocks sliding and caused bonds to rally, the policy-setting Federal Open Market Committee kept unchanged at 5.50 percent its target for the federal funds rate on overnight loans between banks.

"This is a situation where a prudent central banker does nothing and waits until the markets settle down," said former Fed Governor Lyle Gramley, a consulting economist at the Mortgage Bankers Association of America.

The Fed decided to stand pat even though the economy is expanding at an "unsustainable" pace, in the words of Fed Chairman Alan Greenspan.

"Absent the crisis in Southeast Asia, they have all the ammunition they need to raise interest rates. But you don't want to shoot off your gun with the markets all riled up," Gramley said.

The recent turmoil in Asia, in both developed and emerging economies, is why most analysts predicted that the Fed would take no action yesterday. Hong Kong's Hang Seng stock index fell another 4 percent yesterday, helping push U.S. stocks lower, and that sort of volatility has kept the Fed focused on ensuring that there's enough cash in the banking system to allow orderly operation of financial markets, analysts said.

U.S. stocks extended their losses after the announcement, as investor concerns increased that slowing global economies would cut into profits. The Dow Jones industrial average -- down about 45 points just before the FOMC decision -- fell 157 points, or 2.08 percent, to close at 7,401.32.

Meanwhile, as investors looked for secure places to put their money, the benchmark 30-year Treasury bond rose one-half point, pushing down its yield more than 3 basis points to 6.11 percent.

Last Friday, Greenspan signaled that Asian market concerns could be critical when he said U.S. central bankers are trying to figure out how much importance to place on market movements in setting monetary policy. "A focus on asset prices has been a focus of debate for us," he said.

Still, if Fed policy-makers remain concerned that inflation is poised to accelerate, they've got one more meeting this year, on Dec. 16, at which they could act. Labor Department figures Friday showed the unemployment rate unexpectedly fell two-tenths of a point to 4.7 percent in October, the lowest in 24 years, as the economy added a larger-than-expected 284,000 jobs.

Greenspan and his central bank colleagues have repeatedly warned that labor shortages resulting from low unemployment could drive up business costs. "Something has to give," Greenspan said in congressional testimony Oct. 29. Labor alone accounts for two-thirds of consumer prices, and many businesses have been offering increased wages and benefits to attract and retain employees.

Pub Date: 11/13/97

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