AP NEWS
Related topics

Economists Say Fed Unlikely to Change Monetary Policy

May 15, 1990

WASHINGTON (AP) _ Economists who predicted only two weeks ago that the Federal Reserve soon would nudge interest rates higher now say the central bank is satisfied with the inflation outlook and will leave monetary policy unchanged.

Statistics that pointed to an economic downturn in April have dispelled some analysts’ belief that the economy would soon break free of its sluggishness of recent months.

They had been reasoning that renewed inflation would accompany any rebound and require the central bank to squeeze credit.

But now, after looking at new economic reports in the last 10 days, they say the Fed doesn’t need to crack down, at least for awhile.

The unemployment rate in April jumped to 5.4 percent from 5.2 percent, the first increase in nearly a year. Retail sales unexpectedly slumped for the second month in a row. And inflation at the wholesale level improved for the third consecutive month.

″If you’re sitting at the Federal Reserve ... you’re bound to breathe a sigh of relief after seeing those″ numbers, said economist Lyle Gramley of the Mortgage Bankers Association of America, a former Fed board member himself.

The central bank’s Federal Open Market Committee, which includes the seven board members and the presidents of the system’s 12 regional banks, meets behind closed doors today to set monetary policy between now and its next meeting on July 2.

″My guess is the Fed will decide not to change policy,″ said Gramley.

The Federal Reserve last pushed up the benchmark federal funds rate, the interest banks charge among themselves for overnight loans, in March 1989, when it hit 10 percent.

As concern grew that a recession was nearing, the Fed cut the rate through the last half of 1989 until it reached 8.25 percent. Then it paused, waiting to see which way economic winds were blowing.

A consensus for a more restrictive monetary policy appeared to be developing, but with the release of the April reports, the winds changed.

″The guys pushing for tightening pretty much got their heads handed to them,″ said economist Michael K. Evans, a Washington-based consultant. ″If they raised rates now, I would be shocked. The economic statistics are just not pointing in that direction.″

Other arguments against a more restrictive monetary policy include the start of budget talks today between Bush administration officials and congressional leaders, fears of a regulatory credit crunch as bank examiners toughened their audits and international concern about the weakness of the Japanese yen.

If the budget talks succeed in producing budget director Richard Darman’s stated goal - a $45 billion to $55 billion deficit cut - the Fed will have to stand ready to ease interest rates to provide economic stimulus against the dampening effects of higher taxes and reduced government spending.

But the central bank would look for results, not just rhetoric, before easing monetary policy, analysts said.

″The Fed is not going to act on a political promise. ... It will wait until it sees the whites of the eyes of an agreement,″ said economist David Jones of Aubrey G. Lanston & Co. in New York.

He said another factor arguing against a shift to tighter credit was last Thursday’s unprecedented meeting between American Bankers Association and the nation’s three top bank regulators - Federal Reserve Chairman Alan Greenspan, Federal Deposit Insurance Corp. Chairman L. William Seidman and Comptroller of the Currency Robert Clarke.

″It shows there is some concern that the banking system is tightening without being preceded by Fed tightening,″ Jones said.

Although Fed members traditionally focus more closely on domestic developments, currency exchange market movements also point away from higher rates.

A week ago, finance officials from the Group of Seven industrial powers - the United States, Japan, West Germany, Britain, France, Canada and Italy - warned of the ″undesirable consequences″ of a weak yen, which had fallen more than 10 percent since the start of the year.

The consequences include a deterioration in the U.S. trade deficit. A weak yen makes Japanese goods more affordable in the United States and American goods more expensive in Japan.

The yen has since strengthened, but an increase in U.S. interest rates could threaten the recent progress by making dollar-denominated investments more attractive than those based on the yen.

AP RADIO
Update hourly