Fed leaves interest rates unchanged Favorable economic conditions allow for staying the course; Policy-making panel meets; Subdued inflation, steady growth keep outlook optimistic


WASHINGTON -- The Federal Reserve, presiding over a low-inflation, steady growth U.S. economy, stayed the course yesterday -- leaving the overnight bank lending rate unchanged at 5.50 percent.

The move surprised no one. The latest official statistics, which are almost ideal in the eyes of most politicians and economists, gave central bankers little choice other than standing pat. "The data keeps getting better," said Scott Brown, an economist at Raymond James & Associates in St. Petersburg, Fla.

Growth is subdued, producers prices are falling and consumer prices are rising at the slowest pace in a decade, even as the economy continues to add jobs. In fact, some analysts contend the Fed may leave interest rates unchanged for the rest of 1997 as growth decelerates and inflation stays dormant.

"The bottom line is the Fed is on hold right now and will stay on hold until there are clear signs of inflation," said Astrid Adolfson, an economist at MCM MoneyWatch in New York.

Investors, who were already expecting no change in borrowing costs, let U.S. Treasury bonds rise 3/16 in late New York trading, pushing down its yield more than a basis point to 6.51 percent.

Stocks rose with the Dow Jones industrial average climbing almost 115 points to close at 7,918.10.

"We may not understand just how the economy can maintain the highest employment in history without inflation, but it is happening," said William Dunkelberg, chief economist for the National Federation of Independent Business in Philadelphia.

Slower growth can be seen in subdued housing starts, retail sales and industrial production. Those things, coupled with rising inventories, suggest the economy will have a muted rebound in the third quarter from its second quarter slowdown. Early estimates show the economy expanded at a 2.2 percent annual rate in the second quarter. That follows the first quarter's 4.9 percent pace.

Moreover, last week the Fed reported the percentage of factory capacity in use in July retreated from a month earlier. The plant-use rate fell to 83.1 percent last month -- the lowest level since October. A rising plant-use rate is often viewed by central bankers as a warning sign that inflation could accelerate.

And yesterday, the Commerce Department reported that construction started on new houses last month at an annual rate of 1.447 million units. That's the same rate as in June, which suggests housing is rebounding slowly, after a slump in May.

"Raising rates at this time would have been tantamount to putting on a raincoat and carrying an umbrella on a perfectly sunny day," said Anthony Chan, chief economist at Banc One Investment Advisors Corp. in Columbus, Ohio.

Underlying the good times is lack of inflation. Producer prices dropped for the seventh month in a row in July, the first time that's happened since 1931, when Herbert Hoover was in the White House. The Consumer Price Index, meantime, is rising at the slowest annual pace in more than a decade. Labor costs have remained tame even as the unemployment rate has fallen to its lowest point in a generation.

Fed Chairman Alan Greenspan last month signaled that he and his colleagues were in no hurry to raise interest rates.

"The recent performance of the economy, characterized by strong growth and low inflation, has been exceptional -- and better than most anticipated," he said in his semi-annual report to Congress.

News of yesterday's decision by the Fed's policy-setting committee came in a brief statement issued by the Fed's chief spokesman, Joseph Coyne. "The Federal Open Market Committee meeting ended at 12: 40 p.m. There is no further announcement," Coyne said.

In addition, the Fed's Board of Governors left unchanged at 5.0 percent the more symbolic discount rate for loans to banks from the Fed's system of 12 district banks.

Many analysts suggest the latest economic statistics increase the chance that central bankers will stay leave interest rates unchanged until next year.

"The odds are increasing they aren't going to do anything" for the rest of the year, said Mark Vitner, an economist at First Union Corp. in Charlotte, N.C.

The FOMC meets three more times this year, on Sept. 30, Nov. 12 and Dec. 16.

Fed policy-makers last raised the target federal funds rate on overnight loans between banks at their March 25 meeting.

Pub Date: 8/20/97

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