(June 21) – “Recent signs that the economy is slowing may keep the Federal Reserve from raising interest rates next week. But officials at the central bank remain skeptical that the slowdown will be sufficient to restrain inflation, and it could be months before they are ready to declare a formal end to their campaign of market-damping rate increases,” writes Jacob M. Schlesinger in today’s Wall Street Journal.

“‘Is this going to be temporary or longer lasting? Is it going to be adequate to stop any upward movement in inflation?’ Federal Reserve Gov. Edward Kelley asked rhetorically in an interview this week. ‘We don’t know — and it will take some period of time to find out — the answers to those two very critical questions,’ he added, echoing comments made publicly and privately by other Fed officials.”

“A spate of recent economic indicators — ranging from job growth to consumer spending to housing starts — suggests that American economic activity may finally be cooling from the red-hot pace of late last year and early this year. As a result, financial markets are now betting the Fed will keep short-term rates on hold when policy makers hold a two-day meeting next week.”

“Mr. Kelley declined to discuss what policy he will support. But Fed Chairman Alan Greenspan and his colleagues have said little in recent public comments to contradict the impression of inaction.”

“See the Federal Reserve Monitor page for detailed information on central-bank policy.
Officials give several reasons why it would make sense to pause from their yearlong rate-raising effort, which has pushed up the fed-funds target — the rate used for overnight lending between banks — nearly two percentage points, to 6.5%, the highest level in nine years.”

“The main argument would be to see if data to be released over the summer confirms or contradicts the reports of softness for May. The Fed’s monetary-policy committee doesn’t meet again until Aug. 22, giving officials time to parse all the important reports for June and July.”

“Recent investor behavior has also made some officials comfortable with the idea of taking a breather next week. The major stock indexes — with the exception of the Nasdaq Composite Index — haven’t staged strong rallies recently despite the growing perception of Fed inaction. That suggests the central bank doesn’t need to worry about unwittingly creating an additional economic boost by giving cheer to the stock market.”

“Fed officials also expect to see more evidence over the summer that earlier rate increases are finally taking hold. Mr. Kelley noted that the stimulus created by rate cuts implemented during the 1998 Asian monetary crisis is likely only now wearing off.”

“At the same time, most of the increases have been approved only within the past six months, ‘and most economists agree that you don’t get the beginning of an impact until four to six months, maybe eight,’ Mr. Kelley said. ‘There is more to be felt from what has been done to date.'”