Federal Reserve officials appear unlikely to raise interest rates between now and the end of the year, amid several signs that the pace of growth in the nation's supercharged economy has crested.
Fed policymakers meet next on Nov. 16, and many on Wall Street had been convinced they would nudge interest rates a notch higher. The central bank's Federal Open Market Committee (FOMC) last met on Oct. 5 and, even though the policymakers decided then to leave their target for short-term rates steady at 5.25 percent, they adopted a "bias" toward raising them at some point in the future.
But with much of the incoming economic news since last month's meeting indicating some cooling of the economy and a market friendly speech last week by Fed Chairman Alan Greenspan, Wall Street now believes it's a tossup as to whether the Fed will raise rates later this month. "Because of the data, the odds have shifted back in the direction of no change," said Mickey Levy, chief economist for Bank of America in New York.
Housing starts and auto sales have dropped and although labor cost are increasing, they aren't accelerating. The Fed's own survey of nationwide economic conditions released yesterday reported that the nation's strong growth may be weakening around the edges. Several of the 12 regional Federal Reserve banks found some mild slowing in consumer spending, construction and consumer loan demand.
"There is nothing in the numbers to suggest that inflation is about to jump up and get us," Edward G. Boehne, president of the Philadelphia Federal Reserve Bank, said in an interview. "Jobs are plentiful, but that's more of the same that we have seen over the years. . . . We know there is some risk out there of more inflation, but it has not materialized [and it] may or may not materialize."
Other members of the FOMC, the Fed's policymaking group, are divided over the best course for the central bank to follow, according to interviews with several of them.
With the economy growing rapidly at a time the nation's unemployment rate is just 4.2 percent, a few FOMC members would prefer to raise rates because they expect that, sooner or later, inflation will get worse if U.S. labor markets remain so tight.
But Boehne said, "Sooner or later we will have an ice age, but we don't have to go out and get huge furnaces right away."
Greenspan said in a speech last week that he is concerned the economy has been growing at an unsustainable rate, noting that the pool of people seeking jobs has declined from 11.2 million to 9.6 million over the past two years.
But he added that the substantial rise in long-term interest rates in recent months has helped dampen economic growth. And while he didn't spell out all the channels through which that happens, in the current situation they appear to have brought at least a temporary halt to the stock market's sharp gains, trimmed home sales and new housing construction, helped cause a dip in other private construction and taken a bite out of consumer spending for durable goods, particularly new motor vehicles, according to a number of economists.
Meanwhile, Greenspan also indicated he is focusing closely on what is now believed to be accelerating growth in productivity, the official measure of output for each hour worked, which he believes is helping keep inflation in check.
Recent revisions to the Commerce Department's figures for the gross domestic product and its components suggest that labor productivity--which can offset increases in employers' labor costs--has been rising faster than had been thought.
Greenspan emphasized this point in last week's speech: At nonfinancial corporations, productivity has increased nearly 3 percent annually over the past three years and more than 4 percent over the past two. That is sharply higher than the 1.75 percent per year during the 1970s and 1980s, he said.
As long as the pace of productivity growth keeps revving higher, there is room for unemployment to continue at these low levels without adding to inflationary pressures, Greenspan believes.
If rates aren't raised at the coming meeting, there appears to be a consensus among FOMC members that a rate hike is not an option for the following meeting Dec. 21. That would be just too close to the end of the year, with all the concerns about the possible market impact of the millennium computer bug.
Fed officials are confident there won't be any major disruptions from the inability of some older computers to recognize the new year as 2000 rather than 1900 but they don't want to add to the public worries by raising rates at that point. The next opportunity would come at a two-day session Feb. 1-2, though the Fed chairman has the authority to act on his own if the need arises.
In the announcement that followed the Oct. 5 meeting, the FOMC said the committee had adopted a "bias" toward raising rates because of the possibility that inflation would get worse in the future. But that stance "did not signify a commitment to near-term action" and any future move would depend on additional information about the course of the economy and conditions in financial markets, it said.
So far most of the additional information hasn't been the sort to push the Fed to act, but there will be more available between now and the FOMC session. Tomorrow the Labor Department will release perhaps the most important report, on last month's labor market developments.
Payroll employment gains slowed in August and then turned negative last month as a result of Hurricane Floyd's impact on the eastern seaboard, and analysts expect a rebound but there is a wide range of estimates about its size. For his part, Greenspan will be looking to see if that pool of unemployed workers continued to shrink.
Later reports on producer and consumer prices and retail sales for last month will provide the policymakers with further information. Many analysts expect the inflation reports to be benign and retail sales to be relatively weak because of a drop in motor vehicle sales for the second month in a row.
F. Ward McCarthy of Stone and McCarthy, a financial markets research firm, said he believes Wall Street's sense of certainty that the Fed would raise rates on Nov. 16 has eased somewhat, but he still expects an increase. "We think the odds favor a tightening on Nov. 16 but also recognize that data releases immediately ahead will strongly influence the policy deliberations," McCarthy said.
CAPTION: Fed chief Alan Greenspan said he is focusing on what may be accelerating growth of productivity.