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Fed seen holding the line
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June 28, 2000: 9:09 a.m. ET
Few expect a rate increase this time around, though August is uncertain
By Staff Writer M. Corey Goldman
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NEW YORK (CNNfn) - Federal Reserve policy makers are widely expected to hold the line on interest rates at the conclusion of their two-day meeting later Wednesday -- less than six weeks after boosting rates by a stunning half-point -- in the face of growing evidence that the U.S. economy is starting to slow, easing the threat of accelerating inflation.
 All the same, speculation has washed down Wall Street that the Fed isn't finished tapping on the economic brakes just yet. While recent evidence suggests the economy is finally beginning to respond to the Fed's series of rate hikes begun almost a year ago, other, more anecdotal evidence indicates that there is more work to be done, according to analysts.
"From the Fed's point of view, we've had head-fakes before," said Wayne Ayers, chief economist with FleetBoston. "I don't expect that's going to happen. We will see a sustainable slowdown, but it may not happen right away, which could push the Fed later on to raise short-term rates."
The Fed's policy arm, the Federal Open Market Committee, will once again gather around the grand oak table at its Washington headquarters Wednesday to discuss the progress of the economy and whether rates need to go higher to slow it. The Fed last raised its benchmark fed funds target rate on May 16 to 6.5 percent, a nine-year high. It was the first half-point hike in more than five years.
An announcement on rates is expected at approximately 2:15 p.m. ET. For all the latest news on the Fed's decision and what it means for you, click here. For a look at how New Yorkers did when asked to recognize Greenspan, click here.
Small chance of rate hike
The current thinking on Wall Street is that there is a less than 25-percent chance that the Fed's voting members will lift rates at the conclusion of their two-day meeting Wednesday. The Fed funds futures contract for July, which indicates where investors expect the fed funds rate to be at the end of this month, currently has an implied yield of 6.54 percent, not much higher than the current 6.5 percent fed funds rate.
 What has both Wall Street and Main Street treading cautiously is the idea that all the recent evidence of an economic slowdown is only temporary, and that strong consumer spending and rebounding stock market values could lead to a pickup in economic activity in the second half of the year, leading to more tough medicine from Fed.
"I think there's been a slowdown in economic activity, but I don't think it's been an adequate slowdown and I suspect it might be temporary," said Charles Lieberman, chief economist with First Institutional Securities. "There isn't a lot of evidence yet to indicate that the economy is slowing notably."
The evidence that does exist is pretty compelling. Private sector job creation posted its first monthly drop in more than two years in May. Home sales retreated. Retail sales fell back. Manufacturing activity slowed, Personal spending took a breather and the personal savings rate actually increased.
Rising energy costs fuel debate
What's more, the days of unfounded gains in technology stocks that fueled much discussion from Fed Chairman Greenspan and others about stock market excesses and the wealth effect it was generating within the economy are now all but gone. Year to date, the tech-heavy Nasdaq composite index is down 4.4 percent; the index rose a record 85.6 percent in 1999.
 On the flip side, rising energy costs, especially for retail gasoline, are expected to push up consumer prices in the months ahead, and many economists say the Labor Department's June employment report, due for release on July 7, could show a strong rebound from May's steep and somewhat suspicious job losses.
"I find it strange that we had one of the biggest declines in employment in almost two years and no one noticed, and I'm sure they're thinking the same way over there at the Fed," Ayers said.
Either way, the economy is slowing. Growth rang in at a 5.4 percent annual pace in the first three months of the year, down from the torrid 7.3-percent rate registered in the final quarter of 1999. Many Wall Street economists are forecasting growth in the 3.5-percent range for the second quarter, more in line with what Fed officials typically deem a non-inflationary rate of growth.
Still waiting for that slowdown
The White House Tuesday predicted that the economy will grow 3.9 percent this year, above its previous estimate of 2.6 percent but below the 4.6 percent gain recorded for all of 1999. It also predicted that consumer prices would rise 3.2 percent, faster than its initial prediction of a 2.3 percent increase.
The Conference Board gave some additional evidence of slowing Tuesday after reporting that consumer confidence declined in June from a record high in May. Still, for the second quarter, the average reading for the confidence index was the second-highest on record, just down from the first quarter.
 Indeed, the sticky part for the experts is verifying that the slowdown is real, and that it will be sustained enough to keep inflation from flaring up. The first significant economic report that Wall Street will be able to sink its teeth into will be the June employment report, followed up shortly after with the consumer price index report for this month.
"Predicting the long-awaited U.S. economic slowdown can be a risky business," said Sherry Cooper, chief economist with brokerage BMO Nesbitt Burns Inc. "We are now in the fourth year of the 'economic-slowdown' prediction cycle; economists' forecasts of real GDP growth have been shy of the mark for most of the past 16 quarters," she said.
One issue that will undoubtedly gain prevalence as the year progresses is the U.S. presidential election race. History has dictated that the Fed, which is non-partisan when it comes to politics, tends to avoid maneuvering interest rates in the heat of an election -- to avoid undue attention on the economy.
Words louder than actions?
That means that members of the FOMC have only a few more chances to lift rates, if they deem it appropriate. The Fed's next meeting after Wednesday is August 22nd, the meeting after that is October 3, a little more than a month before the elections. The next meeting after that is November 15.
 One thing that analysts will be paying close attention to is the statement that typically accompanies the Fed's rate announcements. Many on Wall Street expect the Fed will hold official rates steady, but use the opportunity to caution about the possible need for more rate increases in the months ahead to ensure the record economic expansion continues forward without stumbling.
"The statement, as usual, will be important," said Rick MacDonald, an economist with Standard & Poor's MMS in San Francisco. "The Fed is widely expected to maintain a steady policy stance, but is also expected to acknowledge that the risks are still toward higher inflation." Consumer prices advanced 0.1 percent in May; on an annualized basis, prices have risen 3.6 percent since January.
No doubt, some economists are hopeful that the Fed will able to sit on its laurels and allow the six rate increases it's implemented over the past year to have the desired effect. The first three rate hikes, which began in June 1999 and lasted through November, were meant to "take back" what the Fed had given during the 1997 Asian currency crisis and the 1998 Russian debt crisis.
The briefcase factor
"When a doctor administers medicine, he or she makes a judgment about the appropriate dosage in advance," said Lieberman. "The Fed has to make that judgment, but there's a chance they've already given out the right dosage and just need an appropriate amount of time for it to take effect."
 Of course, some prefer to put all the economic numbers, models and theories aside and focus on a more simple indicator to help them judge what the Fed will do: Chairman Alan Greenspan's briefcase.
According to Wall Street lore, a bulging briefcase suggests that Greenspan is packing evidence to justify a rate hike. A thin bag, by contrast, indicates that the Fed Chief is comfortable with the pace of the economy and is not planning on presenting reams of statistical data in favor of a rate increase.
Greenspan carried a thin case into the Fed's offices on Tuesday. But before you run out and refinance your house or purchase that second car, remember that Greenspan carried a relatively thin bag into the Fed's May 16 meeting - and the Fed raised rates by half a percentage point that day. 
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U.S. Federal Reserve
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