The economic boom that peaked late last year is fading and not expected to extend into 1995. But analysts say the more moderate growth could persuade the Federal Reserve to hold down interest rates - perhaps even lower them this summer.
"The economy either will have a soft landing or a somewhat harder landing. In either case we should see long-term rates benefiting due to softer economic conditions," predicted economist Sung Won Sohn of Norwest Corp., a Minneapolis bank.The Commerce Department reported Friday that gross domestic product, the government's most comprehensive economic gauge, rose at a strong 5.1 percent annual rate in the fourth quarter last year. For all of 1994, the economy posted its best performance in a decade.
While the fourth-quarter figure was revised upward from an earlier estimate, most analysts said there is little reason to fear inflation and that the growth already has slowed considerably. Official first-quarter reports are not yet available.
The Federal Reserve began raising short-term interest rates in February 1994 and since then has boosted them seven times, doubling one key rate from 3 percent to 6 percent. Banks have followed suit, raising their benchmark prime lending rate accordingly.
But last Tuesday, the Federal Open Market Committee - the central bank's policymaking body - decided at a private meeting to leave rates unchanged, a decision seen by many economists as an indication that the rise in rates, for now, may be over. The panel next meets May 23.
The higher rates approved earlier are still reverberating through the economy, pushing up borrowing costs for businesses and millions of ordinary Americans. Interest-sensitive areas such as purchases of homes and cars have been hit particularly hard.
The Fed's intent was to squelch inflation before a dangerous upward spiral began and to trim economic growth to around 2.5 percent. The rate increases, along with a Mexican peso crisis that has cut into U.S. exports, appear to be having the desired effect.
Many analysts believe economic growth slowed to around 2 percent to 2.5 percent during the first quarter of 1995, which ended Friday. Preliminary government figures for the January-March quarter will not be available until April 28.
"The Fed is pretty much on target," said economist Michael Evans, who heads his own forecasting service in Boca Raton, Fla. "They probably waited too long to tighten in the first place. But they've done a pretty good job."
Evans said Federal Reserve Chairman Alan Greenspan and his colleagues may be reluctant to lower rates in the coming months, but he predicted as the data pile up, they will become convinced the trend toward moderate or lower growth is lasting. Lower rates could be in the cards by the time of the late August meeting of the Federal Open Market Committee, he said.
But other analysts expect inflationary pressures to mount if the economy heats up again.
"As long as employment grows, the consumer will be right back spending. The economy will sustain its momentum," said Eugene Sherman, economist with the Wall Street firm M.A. Schapiro & Co. "The Federal Reserve will have no choice but to tighten again."
Inflation has been below 3 percent for the past three years. It is expected to increase somewhat this year, but nowhere near the point of a runaway wage-price spiral.
"Commodity price inflation is beginning to wane. The increases just don't seem to be passing along to the retail level," said Sohn.
Ironically, the Fed's success in calming inflation fears could produce an economic resurgence down the road. Already, there has been a rally in financial markets in recent weeks that has pushed long-term interest rates down to the mid-7 percent range, about three-fourths of a percentage point below their November peak.
That could spark renewed buying in the housing market.
"Now it's half-time, but the game is not over," said Bruce Steinberg of Merrill Lynch & Co. Still, he added, "we expected the Fed to complete its tightening cycle by early 1995. Indeed, we believe that U.S. monetary policy may be on hold for the rest of the year."