Fed expected to leave US interest rates unchanged Tuesday

Published October 2nd, 2000 - 02:00 GMT

The consensus among Wall Street analysts is that the Federal Reserve will leave interest rates unchanged when it meets Tuesday, amid indications that US economic growth is slowing and inflation remains subdued. 

Analysts agree that the successive US interest-rate hikes since mid-1999 have — by dampening consumer spending — been important in heading off the danger of overheating. 

 

"The combination of productivity increases, the moderation of consumer spending and the strength of the dollar have acted to put a brake on non-energy inflation," says David Our, chief economist at First Union. "That is why the Fed is not going to do anything" when it meets to discuss interest rate Tuesday, he said. 

 

Our expects US Gross Domestic Product (GDP) growth to level off at an annualized 3.0 percent in the third quarter, from 5.6 percent in the second quarter and 4.8 percent in the first. 

He predicts 4.2 percent annualized GDP growth for the last three months of the year, however, due to still high inventory levels. 

 

The Federal Reserve has raised its key interest rate six times between June 1999 and May 2000, representing a total 1.75 percent rate hike which has taken short-term rates to their current level of 6.5 percent. 

In its latest Beige Book, released on September 20, the Fed said US economic growth had continued moderate through August and early September. 

 

Growth in consumer spending slowed, it said. Although labor markets remained tight and employment costs were on the rise, there were few signs that higher wages were being passed on to consumers. This was because worker productivity remained high, and competitive pressures dissuaded companies from charging higher prices, it said. 

Data released in August confirmed the emerging picture of slowing growth. Retail sales increased only 0.2 percent from July and new housing starts were up only 0.3 percent. 

 

Higher oil prices are exerting an upward pressure on prices. In the first eight months of this year, the consumer price index was 3.4 percent higher, compared with 2.6 percent over the same period of 1999. 

 

For Orr, the still unusually high level of oil prices, and the likelihood the dollar will ease, mean that "the core inflation rate will probably go up by a half a point over the next 6 months." 

But most agree that current levels of inflation are acceptable. 

 

Bruce Steinberg, chief economist Merrill Lynch, said that "consumers remain upbeat, despite rising oil prices ... But higher energy prices have reduced purchasing power. More important, the slowdown in job growth has reduced income gains." 

 

Some major US companies have also warned that their results will reflect a slowing pace of growth. Most recently and dramatically, Apple saw its stock end 48 percent lower on the day Friday, pulling other computer makers down with it, after warning that disappointing sales had taken their toll on sale in the three months to September 30. 

 

Analysts at the International Monetary Fund (IMF) nevertheless believe that the expansion of the US economy has not yet run out of steam. With the tight labor market still pressing wage levels upwards, due attention must be paid to keeping the lid on inflation, they said. 

 

The IMF analysts therefore believe the current cycle of interest-rate tightening may not be over, although they see US GDP growth slowing to 3.2 percent in 2001, from 5.2 percent this year.  

Lyle Gramley, a former Federal Reserve Board governor, says Fed chairman Alan Greenspan and other governors seem prepared to tolerate a higher level of annual GDP growth, believing it justified by productivity increases resulting from increased use of information technology. 

 

They are for the time being ready to contemplate GDP growth of between 3.5 percent and 4 percent without sounding the alarm over an overheating economy, Gramley said.— (AFP)  

 

© Agence France Presse 2000  

 

 

 

 

 

 

 

 

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