WASHINGTON -- Federal Reserve officials meeting today are likely to set aside worries over the wobbly dollar and refrain from raising short-term rates, analysts say.
Members of the Federal Open Market Committee open a two-day meeting to review the economy and set monetary policy amid unusual tensions in the bond market fueled by the dollar's downturn in foreign exchange markets.
Bond market participants have fretted that a crashing dollar, which can add to the cost of imports and fuel inflation, would put pressure on Fed officials to raise rates.
Analysts and traders nonetheless expect FOMC officials to stand pat against any further rate increases to get a better fix on how much momentum there is in the economy. Many expect policymakers to raise rates in the weeks and months ahead, taking the federal funds rate to 4.75% or 5% from 4.25%, but not now.
Joining the FOMC discussions for the first time will be Vice Chairman Alan Blinder, President Clinton's first pick for the Federal Reserve Board. Blinder, who served on the President's Council of Economic Advisers, was sworn in last Monday.
"While the Fed may be concerned about inflation, the dollar has stabilized, and there's no urgent need to use monetary policy as a tool," said Daniel Seto, an economist with Nikko Securities Co. International.
In afternoon trading on Friday, the dollar's performance continued to be mixed. Against the Japanese yen, it weakened and was quoted at 98.60, but it rallied for the second straight day against the German mark and was quoted at 1.5940.
Fed policymakers generally do not like to adjust policy out of consideration for the dollar or any other single factor. In fact, under Chairman Alan Greenspan, the approach has been to emphasize a broad overview of the economy and prospects for inflation.
"Obviously, we're getting closer to another Fed tightening, but I don't think they're going to pull the trigger at the meeting," said Anthony Karydakis, senior financial economist for First National Bank of Chicago.
Even with respect to the dollar, there are arguments to be made that the situation is not breeding inflation. Rather than being in a free fall compared with other major currencies, much of the dollar's weakness has taken place against the yen. This means that mostly prices of imports from Japan, not all nations, are potentially affected by the dollar's weakness. And it is unclear to what extent importers, or U.S. competitors, are willing to raise prices when consumer demand seems to be slackening.
According to a report in last week's Washington Post, one view circulating among U.S. officials is that the lower dollar is more a problem of an appreciating yen -- meaning a problem for Japan with its large trade surplus -- than a reflection of fundamental inflation anxieties. Treasury Secretary Lloyd Bentsen, for one, made plain his view that the new Socialist-led government in Japan will not be able to move quickly to ease trade tensions with the United States.
With Fed officials sticking to their focus on the domestic economy and inflation, the case for another increase in rates does not yet seem compelling. "The inflation expectations have been on the rise, but the economic conditions have been mixed," Seto said.
Inflation expectations got a boost with last week's release of the National Association of Purchasing Management report. The group's June price index jumped to 73.5 from 71.5, the highest level since August 1988.
But other components in the report were mixed. While the indexes for new orders and exports increased, the indexes for production and employment softened. Overall, the group's index remained strong but slipped a little to 57.5 from 57.7. A reading above 50 generally signals a strengthening industrial sector.
Separately, the Commerce Department reported that the government's index of leading economic indicators for May was unchanged for the second month in a row, suggesting that the economy will slow in the months ahead.
Still, some analysts suspect the economy still has plenty of punch, and Fed officials will get more information on which way things are going in the next 10 days. The employment report for June is due out on Friday, and the median forecast of economists surveyed by Technical Data calls for a solid increase of 260,000 non-farm payroll jobs. Other key government reports due out next week cover producer and consumer prices and retail sales, which should tell if consumer spending rebounded after a lackluster spring.
Analysts also said they believe Fed officials want to wait to see what comes out of this week's economic summit in Naples. Some say the best medicine for the dollar would be a coordinated move by the U.S. to raise rates while Germany and Japan lower theirs. Bentsen, in comments to reporters last week, said the United States would like to see lower rates in Europe and Japan.
A rate hike by the Fed alone would not carry as much punch in financial markets of one made in cooperation with foreign central bankers. Still, it is not at all clear if German or Japanese monetary authorities are willing to act, and there are Joubts Clinton will bring up the dollar himself because it could lead to appeals for higher U.S. rates. Anthony Lake, Clinton's national security adviser, reportedly said the summit "will not be a forum for working through the dollar issue."
In a separate development, the Fed on Friday released edited transcripts of eight FOMC meetings that took place from August 1987 through June 1988. The Fed also released transcripts of several FOMC telephone conversations, including one on Oct. 20, 1987, after the stock market crashed.