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August 22, 2000

Fed Holds Overnight Bank Loan Rate at 6.5%; Sees Inflation Risk
By Noam Neusner, Bloomberg

You Bet Greenspan is Still Worried About Inflation! ... Weiss comments

WASHINGTON - Federal Reserve policy-makers kept the overnight bank lending rate at 6.5% and warned that the U.S. economy still faces an inflation threat, suggesting additional interest-rate increases are possible in coming months.

After raising borrowing costs six times since June 1999, the Fed's policy-setting Open Market Committee has held rates steady for three months, watching for signs of the slower economic growth they want and evidence that price increases are accelerating.

"The expansion of aggregate demand is moderating toward a pace closer to the rate of growth of the economy's potential to produce," the FOMC said in a statement accompanying today's decision. The language was similar to the Fed's statement June 28, when the central bank also kept the overnight rate at 6.5%.

That suggests the central bankers see an economic slowdown in reports showing a drop in job creation, moderating wage growth and declining sales of new homes, appliances and autos, all of which make the risk of rising prices more remote.

Even so, rising energy prices and higher costs for other goods and services preserve the threat that inflation could accelerate and derail the record-long, nine-year-old expansion, the Fed's statement said.

"Against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the Committee believes that the risks are weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future," the FOMC said.

Though it decided to keep rates steady at 6.5%, the Committee clearly recognizes that the specter of inflation continues to haunt the economy.

According to the committee, "[it] remains concerned about the risk of a continuing gap between the growth of demand and potential supply at a time when the utilization of the pool of available workers remains at an unusually high level." Translation: If consumers continue to spend as they have (consumer confidence is close to record highs and retail sales last month showed their largest gain in 5 months), supply will not be able to keep up with demand.

The Fed is also concerned that the ever-shrinking labor pool (still near a 30-year low) will shrivel up to naught, and productivity will not be sustainable. Even technological investments that have helped increase productivity are nearing capacity. There are already signs that the cost of wages and benefits are beginning to creep up. On top of this, rising energy costs, especially with the approaching winter months, will force price increases.

The Fed will not be able to hold out much longer on raising rates.

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