The Bush administration likely won't get its wish for lower interest rates because of the Federal Reserve's concern over increased inflationary pressures stemming partly from the Persian Gulf crisis, economic analysts believe.
These analysts forecast that short-term interest rates such as banks' benchmark prime lending rate will remain unchanged in coming weeks at 10 percent. Long-term rates, such as 30-year home mortgages, will come under increasing upward pressure, the analysts say.That gloomy assessment of interest rate prospects was being made as Fed policymakers convene in Washington for a meeting of the Federal Open Market Committee. The panel, headed by Fed Chairman Alan Greenspan, is responsible for setting the central bank's interest rate policies.
While the results of the closed-door deliberations will not be disclosed until Oct. 5, many analysts expected the meeting to produce no change in the Fed's current tight money policies despite pleas from the administration for a looser credit stance to keep the country out of a recession.
"The central bank is trapped with the situation in the Middle East limiting the Fed's options considerably," said Allen Sinai, chief economist of the Boston Co. "Ultimately, a recession will bring forth some credit easing on the part of the Fed, but there is simply too much inflation in the system for the Fed to ease at this point."
In normal times with the economy close to a recession, the Fed would be expected to loosen its grip on the money supply and allow interest rates to fall as a way of stimulating economic growth to avert a downturn or at least lessen its severity.
But analysts said that this time around, in part because of the Mideast crisis, inflationary pressures are rising at the same time that economic growth is slowing.
Even before Iraq's Aug. 2 invasion of Kuwait caused oil prices to shoot up by about $8 per barrel, there were signs of growing inflationary pressures. The government last week reported that consumer prices climbed a brisk 0.4 percent in July and for the entire year have been rising at a worrisome annual rate of 5.8 percent.
Any sign that the Fed was giving up the fight against inflation could make investors more skittish and send interest rates even higher, analysts believe.
"Fed policymakers would like to ease but they are hamstrung," said Lawrence Chimerine, a senior fellow at the Economic Strategy Institute, a Washington research organization. "They will not be able to act until both the oil market and the bond market stabilize."
That forecast will not bring cheer at the White House, where the administration has been unrelenting in its pressure on the Fed to lower interest rates to stave off a downturn.
Last week, Treasury Secretary Nicholas Brady said that rising oil prices resulting from the Mideast crisis likely would cut already sluggish economic growth in half for the rest of the year.
He predicted the economy, as measured by the gross national product, would grow at a barely discernible 0.75 percent rate for the rest of the year if oil prices remain near current levels. That would be down from an already anemic 1.5 percent GNP growth rate in the first half of the year.
Many private analysts are even more pessimistic, forecasting that a recession - defined as a contracting GNP - is very likely to begin, probably in the final three months of this year.