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IS FEDERAL RESERVE PUTTING OFF INEVITABLE INCREASE IN RATES?

SHARE IS FEDERAL RESERVE PUTTING OFF INEVITABLE INCREASE IN RATES?

The Federal Reserve is only delaying an inevitable rate increase, some investors say.

At Tuesday's policy meeting, Fed Chairman Alan Greenspan and his colleagues on the Federal Open Market Committee surprised few investors by voting to keep interest rates steady.Yet many are counting on the Fed to raise rates later this year if economic growth threatens to push inflation rates higher.

"If the economy continues to expand, we'll see a tightening later on," said Timothy Browse, who helps manage about $9.2 billion in bonds at Eaton Vance Management in Boston.

One of the Fed's main tasks is to fight inflation while keeping the economy growing. The central bank's chief instrument for changing the economy's speed is its target for overnight loans between banks, also known as the federal funds rate. Higher central bank rates make it more costly to finance everything from cars to factories.

For the fourth time this year, Fed officials voted to leave fed funds at 51/4 percent. The last change in the rate came Jan. 31, when central bankers lowered the rate a quarter point.

Tuesday's decision was a "non-event," said James Welch, who manages about $600 million in bonds at Back Bay Advisors in Boston. Yet opinions change quickly in the bond market.

As recently as a month ago, many investors predicted the Fed would have to boost borrowing rates to cool the economy and keep inflation from surging.

Those expectations shifted after the National Association of Purchasing Management said its manufacturing index fell in July. The next day, the government said the economy added 193,000 jobs in July, less than economists expected. The government also said average hourly earnings declined last month, while the unemployment rate rose to 5.4 percent from the six-year low set in June.

The reports, and later statistics on manufacturing, suggested that wage pressures may be easing, giving the Fed leeway to leave rates steady.

Wall Street economists watch for signs of wage inflation because labor expenses make up about three-fourths of companies' costs. Manufacturers facing higher costs are more likely to boost their prices, pushing inflation rates higher.