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Fed Holds Steady On Rates, But Remains Inflation Wary

By John S. McClenahen For the time being Chairman Alan Greenspan and his Federal Reserve colleagues are staying the course on short-term U.S. interest rates. As expected, the Federal Open Market Committee (FOMC) kept its target for the influential federal funds rate at 6.5% when it met Nov. 15. But unexpectedly, the FOMC did not shift into neutral on inflation. "The utilization of the pool of available workers remains at an unusually high level, and the increase in energy prices, though having limited effect on core measures of prices to date, still harbors the possibility of raising inflation expectations," the panel reasoned. The committee's decision not to boost short-term rates is "prudent," says Jerry J. Jasinowski, president of the National Assn. of Manufacturers, Washington. But Jasinowski believes that the FOMC should have taken out some insurance against a "hard" soft landing of the slowing U.S. economy. "The risk of a steeper slowdown over the next few months is more serious than the risk of a future rise in inflation," asserts Jasinowski. "In view of our slowing growth rate, the Federal Reserve should abandon its tightening bias and adopt a neutral bias in monetary policy -- and should also begin to consider cutting interest rates early in 2001."

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