WASHINGTON -- Analysts are divided over whether the Federal Open Market Committee opted at its meeting this week to retain in policy bias favoring higher short-term rates or to revert to a purely neutral stance.
"Opinion is decidedly split," said Joseph Liro, senior vice president for S.G. Warburg & Co.
Following the usual practice, a Federal Reserve spokesman declined to say what the 12-member panel decided in its Tuesday review of monetary policy.
Policymakers have kept the federal funds rate unchanged at 3% for nearly a year since their last move to ease policy on Sept. 4, 1992. It is the central bank's longest stretch of a steady-as-you-go position on rates in the memory of most Fed watchers.
In May, FOMC officials adopted a trading directive tilted toward a tighter monetary policy in reaction to a surprising burst of inflation that was running at an annual rate in excess of 4% during the first quarter.
In doing so, Federal Reserve Board Chairman Alan Greenspan agreed to consult with members before boosting rates instead of using the discretionary authority he normally has to make a small move in the market.
Most analysis believe the Fed maintained its bias in favor of higher rates in July, when the FOMC met again and Greenspan emphasized the inflation threat in his semiannual monetary policy testimony to Congress.
Since then, however, the economic statistics have turned out to be softer than predicted by Greenspan and most private economists. Greenspan himself forecast that second-quarter growth probably would turn out to be 2 1/2% or higher, when it came in at 1.6%.
More recently, the Labor Department reported that the producer price index fell 0.2% in July, the second straight monthly drop, while the consumer price index was up only 0.1%. Retail sales increased a meager 0.1% last month, and this week the Commerce Department said housing starts dropped 2.7% despite the lowest mortgage rates in more than 20 years.
The roaring bull market in bonds has been boosted by other factors, such as successful passage of President Bill Clinton's economic package and the continuing flow of money from low-yielding bank certificates of deposit into bond funds, analysts said.
Moreover, technical supply and demand factors have been favorable for the long end of the market. Under the Treasury's new policy to increase the use of short-term debt, there will not be any auction of 30-year bonds in the November refunding.
And, analysts said yesterday, the Treasury market has been buoyed by purchases by Far Eastern investors and speculation that Brazil will be buying Treasuries as part of a debt reduction plan with commercial bank lenders.
Investors have expressed their confidence in the market by pushing down yields on the Treasury 30-year bond to 6.25%, a remarkable rally from the 7.50% that prevailed in mid-January before Clinton's inauguration.
David Greenlaw, an economist with Morgan Stanley & Co., said the central bank's move in May to adopt a policy directive favoring higher short-term rates has proved effective. "The shift to a tighter bias served them well," he said. "It reinforced in the marketplace the Fed's long-run anti-inflation commitment and the notion that if there were some bad inflation data down the road, the Fed would act."
But Greenlaw said a shift to a neutral directive might not harm the market. He suggested it would help prices in the short end, where Treasury bills and two-year notes are still up as much as 25 basis points in anticipation of a Fed tightening at some time in the future.
Many analysts continue to say they expect rates to move higher, but just when that might happen is anybody's guess.
According to a survey of securities dealers released last week by Money Market Services, nearly 50% of those questioned said they expect the Fed to raise rates before year's end. That leaves many analysts saying they expect the Fed to remain on hold until some time in 1994.
"My feeling is that they see no need to rock the boat," said David Jones, chief economist for Aubrey G. Lanston & Co.
Jones said he gathered from informal talks he had with Fed officials at a recent University of Wisconsin symposium that the FOMC has probably kept its bias to tighten. Those attending included Minneapolis Federal Reserve Bank president Gary Stern, Chicago bank president Silas Keehn, and Philadelphia bank president Edward Boehne.
"If they take off the bias toward restraint and have to put it on again, they'd look like a zig-zag operation and it becomes a very delicate political issue," said Jones. "They'd come under all types of heat again."
Liro of S.G. Warburg agreed. He argued that the economy is likely to pick up to around 3% in the second half of the year, and that higher prices of gasoline and Japanese cars could give a flutter to inflation again. "It's a close call, but I think they'll leave well enough alone," he said.
Zane Brown, director of fixed income for Lord, Abbett & Co., said he believes Fed officials reverted to a neutral policy directive given the improved inflation picture. The May directive to tighten was appropriate at the time, he said, but it was misinterpreted by the market as a sign that the Fed might move fairly soon to raise rates.
