Fed Holds The Line On Short-Term Interest Rates

The U.S. economy, less than a year ago growing at a torrid rate of better than 6%, seems to have slowed below the Federal Reserve Board's unposted anti-inflation speed limit, believed to be between 3.5% and 4%. So, while keeping an eye out for unexpected acceleration, chairman Alan Greenspan, the nation's chief monetary cop, and his colleagues on the Federal Open Market Committee (FOMC), opted on Aug. 22 not to raise U.S. short-term interest rates. Their inaction leaves the benchmark federal funds rate at 6.5% and the discount rate at 6%. But economist Eric Green of BNP Paribas in New York believes the Federal Reserve folks face a difficult balancing act. Their challenge is to bring supply and demand into greater balance without triggering a sharp rise in the U.S. unemployment rate -- it remains at a historically low 4% -- or depressing incomes or equity prices to the point where consumers might sharply increase their savings. His reasoning: "Previous economic downturns have been accompanied by a rise in the household savings rate, and a sharp rise in savings would not only weaken the central pillar of the current expansion, [but also] it would threaten the soft-landing scenario." The FOMC's next meeting is scheduled for Oct. 3.

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