Dec 21, 1999 - 09:24 AM

Economists Predict Fed to Leave Rates Unchanged Because of Y2K By Jeannine Aversa Associated Press Writer

WASHINGTON (AP) - Even though the economy is growing at a red-hot pace that makes the Federal Reserve nervous, the central bank at the moment has a bigger concern: the uncertainties surrounding the Y2K computer date changeover. Worries that the Year 2000 date change may cause some disruptions to U.S. and global economies - although most experts don't think it will - were leading many private economists to predict that Fed policy-makers will leave rates unchanged at their last meeting of the year.

"I think the Fed would be pulling the trigger on another rate hike had it not been for Y2K," said Richard Yamarone, economist with Argus Research Corp. "But with uncertainties arising from possible problems from the century date change, the Fed will hold the line for now."

The Federal Open Market Committee, made up of Fed board members in Washington and the presidents of the Fed's 12 regional banks, was meeting privately today to review interest rate policy. Financial markets eagerly awaited a midafternoon announcement of their decision.

The central bank has bumped up interest rates three times this year - on June 30, Aug. 24 and Nov. 16 - to slow the economy and keep inflation under control. The three increases, which together totaled three-quarters of a percentage point, left the federal funds rate, the interest that banks charge each other, at 5.5 percent.

Commercial banks matched their higher costs of borrowing by increasing their prime rates, the benchmark for millions of consumer and business loans, pushing the prime in November to 8.5 percent, the highest it has been in two years.

But the Fed's three rate increases haven't done much thus far to slow the economy, which grew by a 5.5 percent annual rate in the third quarter, far above the 3 percent many economists believe is the most that can be sustained without sparking inflation.

"That's the fly in the ointment," said Ken Mayland, an economist with KeyCorp.

With projections for continuing strong economic growth ahead, many economists believe the Fed will boost rates again early next year.

They also cite another reason: that the tight labor market - with the unemployment rate at a 30-year low of 4.1 percent - could lead to wage and price inflation. Economists and members of the Fed are concerned that employers scrambling to hire scarce workers will try to attract them with higher wages and benefits, costs that could boost product prices.

Given these concerns, many economists expect the Fed to switch its policy directive, intended as a signal of future moves, from neutral to one leaning toward a rate increase.

Worries about rate increases next year took a toll on Wall Street Monday as the Dow Jones industrial average lost 113.16 points and nervous bond investors pushed the yield on Treasury's bellwether 30-year bond to 6.44 percent, the highest level in more than two years.

"They (the Fed) will have a significant job to slow the economy down and, if anything, it is speeding up going into next year," said David Jones, chief economist at Aubrey G. Lanston & Co. "They are going to have to do more in tightening than people were thinking."

Jones expects three more quarter-point rate increases next year, probably at the February, March and June meetings.

On Y2K, Fed Chairman Alan Greenspan has expressed confidence that the banking system is prepared to handle the century date change without any major computer failures.

The Fed also has made sure that the financial system has plenty of currency reserves to meet unexpected demands for cash from customers worried that their bank may have a computer glitch that would prevent them from getting their money.

A boost in interest rates this close to the Y2K switchover would add an element of uncertainty that analysts said the Fed wants to avoid.

"I don't think the Fed thinks Y2K will cause big problems for the economy," said Paul Kasriel, an economist at The Northern Trust Co. "But there is a reluctance by the Fed to make any sudden moves right now."

-- Roland (nottelling@nowhere.com), December 21, 1999