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'Beige book' stays rosy
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May 5, 1999: 3:56 p.m. ET
Vibrant growth, negligible inflation suggest Fed will hold rates steady
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NEW YORK (CNNfn) - Interest rates aren't going anywhere for now.
That's the message analysts and market-watchers received Wednesday from the Federal Reserve's so-called beige book , an outlook on the U.S. economy compiled by various regional Fed banks and released to the public eight times a year.
The latest summary, which uses data up to the end of April, was culled by the Federal Reserve Bank of Atlanta. The report will be used as a blueprint for discussion among board members at their next Open Market Committee meeting slated for May 18.
At the meetings, which also take place eight times a year, the Fed decides whether to change short-term interest rates which the U.S. and the rest of the world use as a lending gauge.
"Consumer spending remains healthy" with strong gains in manufacturing output, suggesting consumer demand is still principal cylinder driving the U.S. economic engine, the summary said. Consumer spending accounts for about two-thirds of U.S. economic output.
At the same time, "most districts continue to report tight labor markets, but these conditions are apparently not often translating into higher wages," the Fed said. However, "there are reports that non-wage compensation is increasing," suggesting employees are earning pay increases through bonuses and other non-wage-related incentives, particularly for higher-level personnel.
No sign of inflation
"It confirms that they see what many in the market see, which is no significant sign of inflation, but there are signs that artificially low prices are beginning to recover," said Dick Berner, a senior economist with Morgan Stanley Dean Witter in New York. "Right now the Fed is enjoying the ride and riding on their credibility. There's no reason for them to raise rates and change that."
The Fed last altered its target for overnight loans between banks Nov. 17, lowering the rate by 1/4 of a percentage point to 4.75 percent. It was the third in a series of rate reductions designed to unlock the credit crunch occurring with the bond market and restore calm to jittery financial markets.
Economic growth has surged since then. Last week the Commerce Department reported that the U.S. economy grew at a 4.5-percent pace in the first three months of the year, well above what even the most pessimistic analysts had forecast.
The stock market has also enjoyed heady times in the past six months, a reflection of low interest rates cajoling consumers into spending and allowing companies to borrow money at cheaper rates.
Can't last forever
Still, the party won't last forever, Berner said. "Several temporary factors that have kept prices so low are now recovering," he said. "You can't have an economy run this hot for this long without inflation. That's a view the Fed has been willing to follow along with, but they'll move toward a (tightening) bias soon."
The bond market is already starting to price that in, with the yield on the 30-year benchmark Treasury bond at 5.70 percent, close to a nine-month high. Higher rates on government debt set the trend for banks and other institutions to raise their own key rates, boosting the cost of borrowing and subsequently slowing economic growth.
Still, "that doesn't mean we've seen an end to the downward overall trend in inflation," Berner said. "Several temporary factors have kept inflation low, and those are now recovering, but prices can remain stable over the long term."
Prices for most products continued to be stable, with the notable exceptions of oil, gas and building materials, especially plasterboard that is used in building new homes.
Construction industries were still running at high levels for both residential and office projects, but the pace was beginning to ease in some districts, the Fed said. For example, commercial building rates in the Atlanta area had fallen below year-ago levels and occupancy rates had stabilized in the New York City region, the summary said. 
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