Fed grapples to lay down future course

WASHINGTON -- After racing ahead this spring, the economy's pace slowed this summer, analysts agree. What they disagree about is whether the slowdown will stay put or is merely a pause.

That's the mystery Federal Reserve officials must solve when they meet Tuesday to decide interest rate policy. If they see sufficient evidence that the economy is girding to rebound in the months ahead, then they'll see rising inflation as a danger that must be suppressed.

"Everybody accepts" that growth has slowed in the third quarter, said Ken Mayland, chief economist at KeyCorp in Cleveland. "The question is do things become progressively slower, or ultimately do they firm and start growing?" The consensus now is that economic activity tailed off to the vicinity of 2-to-2.5 percent in the third quarter that ends Sept.30 from the 4.8 percent pace of the April-June quarter. When the government's first report on third-quarter growth comes out next month, predicts Tom Carpenter, managing director of ASB Securities in Washington, D.C., it will show activity that's "cut in half" from the second quarter's brisk pace. That'll please officials at the Fed who, under chairman Alan Greenspan, view an economy growing above the 2-to-2.5 percent range as an inflationary threat. Evidence of the slowdown is easy to find. Consumers, whose spending accounts for two-thirds of the economy, cut back on their spending in the dog days of August. Retail sales rose just 0.2 percent, a third of what analysts had expected. Construction spending also declined, and a larger-than-expected increase in inventories in August indicates that businessmen will be spending less to restock their shelves in coming months. The big drop in exports last month, by itself, could knock as much as 0.7 percent off third quarter growth, economists said. Equally comforting to the Fed is the serene quality of 92

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