Fed Expected to Keep Rates Steady
|September 20, 2006|
The Houston Chronicle / Associated Press
WASHINGTON — With the economy shifting into a slower gear and inflation apparently retreating, Federal Reserve officials are likely to pat themselves on the back for engineering a soft landing and leave interest rates alone.
In the widely held view of private economists, Fed Chairman Ben Bernanke and his colleagues will decide at Wednesday's meeting to extend their pause on rate increases, believing that a slowing economy and falling energy prices are starting to relieve inflation pressures.
"The Fed will do nothing. There is no reason for them to change the stance of monetary policy," said David Wyss, chief economist at Standard & Poor's in New York.
That would mean that the federal funds rate, the interest that banks charge each other, would remain at 5.25 percent and banks' prime lending rate, the benchmark for millions of consumer and business loans, would stay at 8.25 percent.
Before the Fed started raising rates in June 2004, the funds rate stood at a 46-year low of 1 percent and the prime rate was at 4 percent.
The Fed at its last meeting on Aug. 8 voted to leave rates unchanged after raising them for 17 consecutive times over the past two years, the longest string of rate increases in Fed history.
At the time, Fed officials stressed that they were ready to raise rates further should the need arise.
Analysts are split, however, on whether the pause will be indefinite or whether at least one more rate increase will occur before the end of the year.
While global oil prices have fallen significantly from their highs above $77 per barrel, there are still worries about inflation pressures coming from wage increases outstripping productivity gains.
Those concerns were heightened by a report earlier this month that productivity slowed in the spring at the same time that labor costs jumped by 4.9 percent after an even bigger 9 percent rise in the first quarter.
That increase, if it continues, has some analysts convinced that the Fed will raise interest rates at least one more time before moving to the sidelines.
"There are incredibly divergent views about how things are going to unfold," said Mark Zandi, chief economist at Moody's Economy.com.
Economists who believe the Fed is finished raising rates point to the drop in energy prices as a major factor that will help slow price pressures going forward. That development is already showing up in slower increases in consumer and wholesale inflation.
Also helping to lower inflation pressures has been a big slowdown in housing following a five-year boom in which home sales soared to record highs, powered by the lowest mortgage rates in four decades.
That situation has reversed this year, with sales of both new and existing homes falling. And the government reported Tuesday that construction of new homes and apartments plunged in August to the slowest pace in more than three years.
The slowdown in housing is expected to keep inflation in check. The Fed's goal in raising interest rates has been to slow the economy enough to reduce inflation pressures, achieving a hoped-for soft landing.
"Falling energy prices, further weakening of the housing sector and a few tame inflation reports have put a lid on inflationary expectations for the time being," said Thomas McManus, an economist at Banc of America Securities.
He said the funds rate is probably at its peak and will not be increased further, a change of view from early July when he was predicting two more rate hikes.
But David Jones, an economist at DMJ Advisors in Denver, said he believed the Fed would raise rates one more time, probably in October, before calling it quits.
"My guess is that they will go up another quarter-point and then hold it there through the entire first half of next year," Jones said. "By this time next year, with growth slowing, the Fed could be easing."
Whatever happens, analysts are not looking for interest rates to go up much from where they are now unless inflation gets out of hand and the Fed starts aggressively raising rates again.
Mortgage rates actually have been falling in recent weeks, with the 30-year mortgage rate down to 6.43 percent in the latest Freddie Mac survey, compared with a high this year of 6.8 percent reached in late July.
Financial markets, where long-term rates are set, have rallied in recent weeks on the belief that falling energy prices and a slowing economy will help to push inflation levels back down to the Fed's comfort zone.
© 2006 The Associated Press