The US Federal Reserve, loath to rattle investors worried about Y2K disruptions, is expected to leave interest rates unchanged this week but could issue a warning that tighter credit policies are likely in the new year.
The Fed's policy-making Open Market Committee convenes tomorrow at a time when the torrid pace of the US economy is showing no sign of easing, a situation that, under ordinary circumstances, could justify an increase in short-term rates.
But analysts appear to be near unanimous in predicting there will be no change in the federal funds rate, currently at 5.50 per cent. The rate, a target used by banks making overnight loans among themselves, affects the cost of credit throughout the economy.
According to Mr John Lonski, chief economist at the investment service firm Moody's, the Open Market Committee will be sensitive to worldwide jitters about the capacity of computer systems to read the new year as 2000 rather than 1900.
"I think the committee will leave monetary policy unchanged," Mr Lonski said, "but it would not be a total surprise if they adopted a tightening bias and warned investors to get ready for a rate hike in February 2000."
He said a clear signal from the Fed that it was ready to pull the trigger on interest rates would be aimed primarily at Wall Street in hopes of "diminishing speculative bidding in the equity market". But with the economy rocketing along at a 5.5 per cent annual pace, unemployment down to 4.1 per cent and retail sales that jumped an unexpected 0.9 per cent last month, the Fed would have plenty of reasons to raise rates.
If sales in December rise just 0.4 per cent, said Mr Mark Vitner, a senior First Union economist, the fourth quarter will see sales grow at a 6.1 per cent annual rate. "That means GDP (gross domestic product) will also come in a little stronger than expected and should easily top a five per cent annual rate."
The political problem for the Fed is that despite such activity, there is still little evidence of serious upward pressure on prices. The consumer price index in November rose just 0.1 per cent, and the core rate, which excludes food and energy, gained a modest 0.2 per cent.
Most experts, notably the Fed chairman Mr Alan Greenspan, attribute the ability of the US economy to grow rapidly in the near absence of inflation to technology-driven labour productivity gains. Productivity in the third quarter increased 4.9 per cent, its sharpest quarterly rise since the fourth quarter of 1992.
