Increase in rates by Fed in doubt

Survey finds little evidence of inflation

August 12, 1999|By BLOOMBERG NEWS

WASHINGTON -- The U.S. economy is expanding with little signs of inflation, the Federal Reserve said yesterday in a report that some analysts said will take the edge off investor expectations that central bankers will raise interest rates again soon.

The report -- compiled by the Federal Reserve Bank of New York -- is one of eight produced each year for the Federal Reserve Board. The survey based its conclusions on expanding manufacturing, strength in retail sales and construction, and rising loan demand. That leaves the current expansion on track to set a record for longevity early next year.

At the same time, the Fed said most regions of the country reported more jobs than workers to fill them. "Despite the labor shortages, none of the districts report evidence of any broad-based acceleration in wages," the report said. "There is no evidence of any broad-based pickup in consumer price inflation."

"People have been saying a Fed tightening is a slam-dunk on Aug. 24, but it's not," said Diane Swonk, chief economist at BankOne Corp. in Chicago.

Tight labor markets were reported in most districts, the Fed said. "There are severe shortages of skilled construction workers in most districts," the report said.

Still, with little wage pressure, "consumer prices remain relatively stable despite some apparent intensification in input price pressures," the report said. Prices for construction materials, transportation and energy have been rising, it said.

"Retail sales, which had been robust in the second quarter, decelerated somewhat in July, in some cases due to low inventories of clearance merchandise. Manufacturing activity continues to expand in most parts of the country, though a few districts indicate some softening," the report said.

Construction of housing and commercial real estate remain "generally strong," the report said. "Loan demand is steady or rising in most districts."

The Fed's regional outlook is based on reports from the Fed's 12 district banks, and is published eight times each year. The latest edition was compiled by the Federal Reserve Bank of New York. Information was collected before Aug. 3.

The beige book report will help form the basis for discussion on interest rate policy at the Aug. 24 meeting of the Fed's policy-setting Open Market Committee.

At the last meeting, June 30, the committee voted to raise the overnight bank lending rate by a quarter percentage point to 5 percent, saying labor market pressures require it to be "especially alert to the emergence, or potential emergence of inflationary forces that could undermine economic growth."

The latest beige book underscores other reports that the economy is not slowing as much as the Fed had expected this year.

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