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Fed is unlikely to raise rates until early next year

Federal Reserve policymakers may refrain from raising interest rates until early next year if the economy's ability to grow vibrantly without producing additional inflation persists, economists say.

The central bank concluded a closed-door meeting of its policy-making committee on Tuesday without raising its benchmark rate on overnight loans between banks.It has held at 5.5 percent since March, when the Fed nudged it a quarter percentage point higher to curb excessive demand. Policy-makers could raise it another quarter point as soon as their next meeting on Nov. 12 or perhaps at the one after, on Dec. 16. But not necessarily.

It all depends on whether economic growth moderates enough to avoid increasing strain on factory capacity and the labor supply, two factors crucial to whether inflation accelerates.

"The notion is the strong economy and tight labor markets will produce some signs of higher inflation to come," said economist Allen Sinai of Primark Decision Economics. "But I hasten to add it doesn't have to happen."

During the first half of this year, the economy grew strongly - at a 4.1 percent rate. At the same time, inflation diminished. Excluding volatile food and energy costs, consumer prices have advanced at a scant 2.2 percent annual rate so far this year, the best since 1965.

Why is a subject of great dispute among economists.

Some see it as luck. Temporary factors such as declining import prices because of the strong dollar, a slowdown in health insurance costs, a drop in oil prices and plummeting computer costs have held inflation in check, they argue.

Others suggest the economy has entered a new era of increased productivity driven by the rapid advance of technology in such fields at computing and telecommunications. That is allowing corporations to pay workers and stockholders more without raising prices faster than before.

"It's unusual to have so strong an economy fail to produce any inflation thrust. . . . But because of the nature of the current situation, who's to say it can't keep going on for a long time?" Sinai asked.

Moreover, many analysts believe growth will fade to a more stable level of around 2.5 percent during the final three months of this year and next year, permitting Fed officials to watch developments quite a while longer.

"I wouldn't be surprised at all if they wait until the first week in February, their first meeting in 1998. Between now and the end of the year, we probably will not see a surge in inflation and, even if inflation did come, it is likely to come gradually, allowing enough time for the Fed to act," said economist Sung Won Sohn of Norwest Corp. in Minneapolis.