Expectation of Unmchanged Interest Rates Come True

WASHINGTON _ Confronted with mounting evidence of an economic slowdown, the Federal Reserve did the expected Tuesday and left interest rates unchanged.

Analysts said the central bank may keep interest rates on hold for months to come until there are clear signs where the economy is headed.

The Federal Open Market Committee, the central bank's policy-making body, met for three hours behind closed doors without taking any action on interest rates.

Afterward, Federal Reserve spokesman Joseph Coyne said there would be no further announcement. Under rules the central bank adopted this year to help guide financial markets, that means that there was no change in monetary policy.

During a 12-month period that ended Feb. 1, the Fed acted in seven stages to double _ to 6 percent _ the rate that banks charge each other for overnight loans. That in turn pushed the bank prime lending rate up to 9 percent, and both rates have remained at those levels now for nearly four months.

Many analysts anticipate the economy will regain momentum this year, forcing the Fed to step in again and raise rates. But they said that is not likely to occur at the Open Market Committee meeting July 5-6 and may not take place until the fall.

"I'm bullish," said economist Samuel Kahan of Fuji Securities Inc. in Chicago. "I think this is a pause that refreshes and the next step will be a pickup in the economy that leads to a tightening."

But he said it could be August or September before there is enough hard data "to convince people there is some direction" to the economy.

Other analysts say the growth is much weaker than it appears and that the previous interest rate increases by the Fed have yet to show up fully.

"The momentum has slowed. No one is disputing that," said economist Sung Won Sohn of Norwest Corp., a Minneapolis bank. "But what the Fed does not know is how much of the previous credit tightening will come out of the pipeline in the future."

Predicting the Fed will cut interest rates as the 1996 election year approaches, Sohn said Chairman Alan Greenspan and his colleagues "have to be sensitive to economic indicators and they also must have pretty good political antennae."

Financial markets ended the day strongly after the FOMC announcement. The Dow Jones industrial average, which has climbed more than 700 points since Thanksgiving, gained 40.81 points and closed at 4,436.44, just shy of its alltime high. A bond rally pushed the yield on the Treasury's 30-year bond down to 6.86 percent.

While economic growth has slowed, the expansion has been an unusually long-lasting one and is now in its fifth year.

The economy expanded at a booming 5.1 percent annual rate in the last three months of 1994 but slowed to a moderate 2.8 percent pace in the first quarter this year. Many analysts expect the second quarter to be even slower.

Still, earlier increases in commodity prices are generating inflation pressures. Inflation, which was up 2.7 percent last year, could jump to around 4 percent this year, forecasters say.

Those who expect an economic resurgence this year point to easing in mortgage rates that will help spur home buying and growing consumer confidence that will chip away at high business inventories.

"My guess is the economy will snap back sharply," said Eugene Sherman of the Wall Street investment firm, M.A. Schapiro Co. Inc. "The Fed would be inclined to tighten, but I think the earliest would be in August."

The Federal Open Market Committee has 12 members _ the seven Fed governors in Washington and five of the 12 regional bank presidents. They meet in private eight times a year.

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