Advertisement
  1. Archive

Fed will probably delay rate increase

Even after Tuesday's sharp rebound in stock prices, analysts said the turmoil in the markets will force the Federal Reserve to postpone consideration of raising interest rates until next year and could diminish any risk of the economy overheating.

Federal Reserve Chairman Alan Greenspan is scheduled to lay out his view of the economy to a congressional committee this morning, and economists said he would almost certainly avoid making any comments that might unnerve the markets.

In his last congressional testimonythree weeks ago, Greenspan warned that the bull market might not be sustainable, and he suggested that further declines in the already low unemployment rate could cause inflation. His comments led investors to conclude that the central bank might raise rates as soon as its next policy meeting on Nov. 12 if unemployment fell more and growth remained strong.

"The market turmoil has obviated the need for any Fed tightening in the near term," said James O'Sullivan, an economist at J.P. Morgan & Co. "If anything, it's the chairman's role to calm the markets rather than giving them anything to worry about."

Because Wall Street bounced back so strongly Tuesday _ and because the financial system had no apparent problem weathering the market plunge Monday _ Greenspan is unlikely to make any explicit promise to loosen monetary policy to reassure investors, analysts said.

Instead, they said, Greenspan is likely to emphasize the same message that the Clinton administration has stressed over the past two days _ that the economy and the financial system remain fundamentally sound.

Speaking in Chicago on Tuesday morning about the time that the Dow Jones industrial average was shooting back into positive territory for the day, President Clinton said the economy is "as strong and vibrant as it has been in a generation."

Greenspan will be able to point to new statistics released Tuesday suggesting that the risks of inflation are not increasing substantially. The Labor Department reported wages are not rising at a rate that greatly increases the danger of inflation.

The Conference Board, a business group, said the high levels of consumer confidence that had been helping drive growth had begun ebbing even before the stock rout Monday rattled investors.

Economists said the Federal Reserve may also have pared its growth projections to account for the troubles afflicting Asia.

The United States sends about a third of its exports to Asia, and the weakened economies there, combined with a strong dollar, are likely to reduce demand for American goods sufficiently to trim economic growth in the United States for the rest of this year and into the next.

The devaluation of many Asian currencies also will depress the price in dollars of goods imported from that region, helping restrain inflation in the United States, economists said.

"Economic growth is in the process of slowing down," said Sung Won Sohn, the chief economist for Norwest Corp. in Minneapolis.

"The stock market correction is going to make the slowdown a bit more pronounced, especially because the balance of trade will deteriorate as a result of the Asian currency meltdown."

Sohn said that Greenspan's concerns about the tight labor market are unlikely to have dissipated and that the economy may not slow sufficiently to avert the outbreak of wage and price pressures early next year.

"I don't think we should eliminate the possibility of a Fed tightening in February if financial market conditions stabilize," he said.

Even in the absence of market turmoil, Tuesday's economic reports would likely have strengthened the case for the Fed holding interest rates steady for at least another month or two.

YOU MIGHT ALSO LIKE

Advertisement
Advertisement