Fed Holds Steady on Interest Rates

WASHINGTON —  The Federal Reserve Board on Wednesday held interest rates steady amid signs that the economy is on course for modest growth with stable inflation next year.

The Federal Open Market Committee, which sets interest rates for the central bank, announced the policy status quo following 3 1/2 hours of discussion.

Earlier in the day, the government had reported that inflation at the wholesale level had risen by 0.4% in October, but excluding the volatile food and energy sectors, the core rate of inflation had actually fallen by 0.3%, the biggest decline in two years.

Financial markets greeted the Fed announcement, which had been expected, by pushing stocks further into record territory. The Dow Jones industrial average closed up about 8 points, its sixth straight record close.

“The Fed has hit the jackpot in terms of producing what it has been trying to achieve,” said David Jones, chief economist at Aubrey G. Lanston & Co. in New York. “We have a soft landing in which economic growth has slowed to a sustained, noninflationary pace.”

Many economists said that as long as the inflation numbers are well-behaved, the Fed will be content to remain on the sidelines.

The central bank last changed policy on Jan. 31, when it cut its so-called federal funds rate--the interest rate banks charge one another--to 5.25% in an effort to keep the economy from dipping into recession.

When growth revived strongly in the spring, helping to push the U.S. unemployment rate to a seven-year low of 5.2% in August, many economists began forecasting an increase in interest rates to slow business activity before wage and price pressures got out of hand.

Speculation about a rate increase hit a peak at the Fed’s previous meeting Sept. 24 following an unusual leak that showed eight out of 12 Fed regional bank presidents had petitioned for an increase.

However, the central bank did not raise rates at that meeting, and since then there has been a string of reports showing that economic growth has slowed from the 4.7% clip in the spring to a much more sedate 2.2% rate in the July-September quarter.

Analysts said they expect growth to remain at that level for some time, which would satisfy the Fed’s desire for growth slow enough to keep demand for labor or products from pushing up prices.

“With inflationary pressures remaining benign, the Fed will clearly remain on hold for the rest of this year and most likely through the first half of 1997,” said Bruce Steinberg, senior economist at Merrill Lynch in New York.

The government will report on consumer prices today; a moderate increase of about 0.3% is expected.

The government said the 0.4% October increase in wholesale prices followed a 0.2% September gain and left the producer price index rising at an annual rate of 2.4%.

Energy prices jumped 1.9% in October, the biggest gain since April. Gasoline prices surged 5.5%.

Food costs were up 0.8%, reflecting higher prices for beef, pork, vegetables, fruit and a 5.9% jump in fish prices that was the biggest one-month increase in nearly four years.

Economists predicted better news in the months ahead for both energy and food costs.

“Energy prices have already retreated sharply from the highs reached in October, and given the favorable crop outlook, food prices should be extremely well-behaved over the next few months,” said Marilyn Schaja, economist at Donaldson, Lufkin & Jenrette.

The 0.3% drop for wholesale prices excluding food and energy was the biggest one-month decline since a 0.4% fall in October 1994.

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Productivity

Percentage change from previous quarter at annual rate, seasonally adjusted: 0.2%

Source: Labor Department