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Fed holds rates steady
July 2, 1997: 2:25 p.m. ET

As expected, central bank leaves short-term interest rates unchanged
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NEW YORK (CNNfn) - The U.S. Federal Reserve's monetary policy committee on Wednesday chose to leave short-term interest rate unchanged.
     The continued lack of inflationary pressures is widely believed to be the reason for the Fed's decision. "It may be a year and a half or so before we see enough inflation for the Fed to start digging in," said economist Roger Kubarych of Kaufman and Kubarych Advisors.
     In its last meeting on May 20, the Federal Reserve did not change the federal funds rate -- the benchmark rate banks charge each other on overnight loans. The last time the Fed raised rates was at its March 25 meeting when it increased the federal funds rate 0.25 basis points to 5.5 percent.
     While the economy has been expanding and unemployment has dropped to a low 4.8 percent, those typical signs of inflationary pressures have been offset by gains in productivity, economists say.
     Recent economic figures, including Wednesday's report from the Commerce Department that May factory orders were off 0.7 percent also may be signaling that the economy is slowing on its own.
     Analysts are unwilling to relax completely, however. The Fed's upcoming Aug. 19 and Sept. 30 meetings are causing some unease.
     "Perhaps we get a [0.25 percent hike] in August and one in September," said Stuart Freeman, chief equity strategist at A.G. Edwards. The possibility of those hikes, he added, should act as a drag on the markets in the intermediate term.
     "We think right now we're looking at a range in the intermediate term between [the current] level to 8,000 and down into maybe the 7,300 area," said Freeman. "At the same time, as you look at those levels to the 8,500 target we see for next year, there's still good opportunity for gains."
     But Jack Baker, head of trading for Furman Selz, disagrees.
     "I think we're in very good shape for the balance of the year. I now believe that we could squeak by this year without any rise in rates."
     While strong economic growth coupled with low unemployment once meant looming interest rate hikes, that no longer seems to be the case.
     Michelle Laughlin, Treasury market strategist for Prudential Securities, says Greenspan may be more worried now about deflation.
     "The chairman may be more worried [that] technological changes -- structural changes that have taken place with the ending of the Cold War -- [may] be contributing to low inflation and we actually need stronger growth to prevent deflation," she said.
     Cary Leahy, chief U.S. Economist for High Frequency Economics, believes, however, that if the job market continues to tighten, the Fed will not be able to ignore it. For now, though, inflation seems to be a minimal threat, he said.
     "There have been more sightings of Elvis than there have been of inflation." Back to top
-- Randy Schultz


Fed holds rates steady - May 20, 1997


Board of Governors of the Federal Reserve

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