Fed Set to Hold Interest Rates

WASHINGTON -- Shaky global financial markets are set to keep the U.S. Federal Reserve from pushing interest rates up this week, despite hard-to-ignore warning signs of overheating in the booming U.S. economy.

Not even Friday's surprisingly strong jobs figures -- U.S. unemployment is at its lowest level in 24 years, raising fears that growing wage pressures might rekindle inflation -- could sway analyst forecasts of steady rates when Fed policy-makers meet Wednesday to chart the path of borrowing costs.

"Asia will be saving us this week," said Joel Naroff, Philadelphia-based economist of First Union Corp. "They did have enough in hand to make the move next week. Barring Asia, there would have been a possibility."

The turmoil that has swept Southeast Asia triggered wild gyrations on world stock markets and contributed on Oct. 27 to the largest single-day point drop in the Dow Jones index of key U.S. stocks -- quickly welcomed by Fed Chairman Alan Greenspan as all-but-overdue.

Stocks have made back some of those losses, but investors would still be well-advised to keep their seatbelts fastened as markets continue to seesaw amid widespread concern that the troubles in Asia are far from over.

For example, Tokyo's 225-share Nikkei index plunged 4.2 percent Friday, while Hong Kong's Hang Seng Index lost 2.96 percent, contributing to a 1.3 percent fall in the Dow Jones. And few observers believe this week will bring much relief.

"Right now, the preoccupation for the Fed has to be with the financial instability around the world that has touched the U.S. market and does represent real concerns for the U.S. economy," said David Levy, vice chairman at the Jerome Levy Institute, an academic forecasting center in Mount Kisco, New York.

Not a single one of 24 economists polled Friday said they expected the U.S. central bank to tighten credit Wednesday. Only two said it would do so at the Federal Open Market Committee's last meeting this year, on Dec. 16.

Fed policy-makers last raised interest rates March 25, when they bumped up the federal funds rate -- which banks charge each other for overnight loans -- by a quarter point to 5.5 percent in a bid to head off inflationary pressure.

In its four subsequent meetings the committee opted to keep its hands off the interest-rate trigger.

But there is a growing chorus of observers who say the Fed would have chosen to bump up interest rates pre-emptively this week, raising investment costs to put a damper on economic activity, had it not been for the Asian swoon.

"The odds of a Fed tightening in the absence of the financial market strains would not be 100 percent but would still be a pretty good bet," said Lou Crandall, economist at Wrightson & Associates in New York.

After all, analysts point out, the U.S. economy continues to grow at a rate far above what most would consider sustainable by traditional economic wisdom. Growth in the year's third quarter has been estimated at 3.5 percent after 3.3 percent in the April-June period.

"Not only is the economy running above trend, but the Fed's forecast of a perceptible deceleration hasn't materialized," said Crandall.

Greenspan's unusually explicit warning Oct. 8 that the U.S. economy may be on an "unsustainable track" is still ringing in many ears on Wall Street.

His second-in-command, Alice Rivlin, said Friday she saw no reason why the seven-year U.S. expansion could not continue as long as policy makers were "careful."

"This is an economy running at very high speed with very tight labor markets," she said. "The danger seems to be on the inflationary side, and not on the deflationary side."