Fed Leaves Interest Rates Unchanged --- Policy Makers Don't Fear Threat From Inflation; Factory Orders Increase
WASHINGTON -- Despite continuing signs of economic momentum, the Federal Reserve still isn't convinced that growth is so strong that it is straining capacity and threatening higher inflation.</br></br>After a two-day meeting that ended Wednesday, the Fed's policy-making committee voted to leave short-term interest rates unchanged. Whether it tightens rates at its next policy session Aug. 20 -- as many economists expect -- depends on what signals the economy sends on prices and growth in the next few weeks.</br></br>"There just wasn't enough evidence yet," said Chris Varvares, an economist with Macroeconomic Advisers, a St. Louis forecasting firm. "Core prices are still decelerating, and there are clear signs that the burst of strength in the second quarter will slow to a more sustainable level during the second half."</br></br>Over the next six weeks, the Fed will get critical new economic data, beginning this morning with new payroll and unemployment numbers. Also due soon are consumer and wholesale prices, retail sales, wages and the first estimate of total second-quarter growth. Many economists expect that number to exceed a 4% annual rate, compared with 2.2% in the first quarter -- well above the level thought to be sustainable without higher inflation, given today's tight labor markets.</br></br>In their deliberations, Fed policy makers had to look ahead into next year and would have tightened rates if they saw a clear threat of unsustainable growth leading to rising inflation. One factor that may have helped forestall a rate increase was the rising value of the dollar compared with the yen and mark, a rise that will brake the economy by cooling the booming export sector.