Rate boost isn't likely Fed is expected to stand pat at meetings this week

The back burner effect

Asia's troubles reducing concern about U.S. inflation


June 29, 1998|By BLOOMBERG NEWS

NEW YORK -- Federal Reserve policy-makers are expected to keep interest rates unchanged for a 10th straight meeting when they gather tomorrow and Wednesday, according to Wall Street's biggest bond firms.

A survey of economists, strategists and traders at the 34 primary dealers -- the firms that deal directly with the Fed's securities trading desk -- found that all predict that central bankers will stand pat this week. Asian turmoil is reducing concerns about U.S. inflation.

"What's going on overseas puts everything else on the back burner," said Bernie Jenson, head of government bond trading at Fuji Securities Inc.

The U.S. central bank last changed the target for overnight lending between banks in March 1997, increasing it by a quarter of a percentage point to 5.5 percent.

Earlier last week, the government said gross domestic product rose at a 5.4 percent annual rate in the first quarter. That marked the sixth straight quarter of growth above 3 percent, the longest such streak since the third quarter of 1984.

Many analysts fret that the brisk pace of growth will eventually prompt the Fed to raise interest rates. Fed officials have said they consider 2.5 percent a target rate for noninflationary growth. The Fed's policy committee dropped its neutral stance on interest rates at its March 31 meeting and adopted a bias toward raising rates.

Yet inflation hasn't been a problem. The Consumer Price Index rose at a 1.7 percent annualized rate through May, below the subdued 2.2 percent pace in the year earlier period.

"With inflation at such low levels, the Fed has the luxury of sitting back and waiting for developments to unfold," said Claude Persico, an economist at Dresdner Kleinwort Benson.

Asia's turmoil has overshadowed strong U.S. economic growth since late last year, when the region's financial strains first came to light.

There are signs that Asia's problems are starting to drag on U.S. growth. The trade deficit ballooned to a six-year high in April, while business inventories rose a record $105.7 billion in the first quarter, the government said.

Businesses now have to find a way to sell those goods that are piling up in warehouses and on store shelves, as they contend with falling import prices -- brought on by the strong dollar -- and the economic slowdown in Asia.

Turmoil in Asia flared again in recent weeks as the yen fell to an eight-year low against the dollar and Japan exhibited few signs of moving quickly to turn around its slumping economy.

That has some analysts suggesting that Asia's problems could cut as much as 1 percentage point from growth in the second half of the year and prompt the Fed to lower interest rates.

"There is less of a case to be made for a high funds rate in an economy that is slowing," said James Glassman, an economist at Chase Securities Inc.

Yet, many economists surveyed expressed concern that robust growth in the employment market may still prompt the Fed to raise interest rates even before inflation picks up. An unemployment rate at 28-year lows is raising concern that a scarcity of workers will compel employers to raise wages and prices.

"We don't see growth slowing enough to loosen the labor market," said Henry Willmore, an economist at Barclays Capital Inc. The firm expects Fed policy-makers to raise interest rates when they meet on Sept. 29.

In the meantime, traders and analysts say the Fed is on hold as it watches events unfold in Asia and gauge the implications for the U.S. economy.

The three-month Eurodollar futures contract expiring in September recently yielded 5.68 percent, not far from the 5.69 percent rate on three-month borrowing. That's a sign that investors don't expect rates to be much different when the contract expires in mid-September.

"It's all contingent on how the overseas markets settle out," said Marilyn Schaja, an economist at Donaldson, Lufkin & Jenrette Securities Corp. "We're all looking at the same influences."

Pub Date: 6/29/98

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.