WASHINGTON -- Inflation hawks may have lost some ammunition as the Federal Reserve's monthly survey of business activity around the nation uncovered only slight growth in May and early June.

"There is no justification in this report for tightening monetary policy," said Robert G. Dederick, executive vice president and chief economist at Northern Trust Co., Chicago.

The "Beige Boo," which surveys condition in each of the Fed's 12 districts, reported on Wednesday that business activity was increasing at a "slow to moderate pace" in most areas. Manufacturing was reported to be steady or improving, "with only scattered reports of upward price pressure in this area."

Fears of Rate Rise

The report eased some of the sting from comments by Fed Vice Chairman David Mullins that suggested he was, ready to sign on with inflation haws for an increase in interest rates.

"The Fed doesn't have any economic or political justification for tightening rates, but the focus there is on a preemptive strike," said Sun Won Sohn, chief economist at Norwest Corp.

The Beige Book findings, he said, added further weight to the case for holding down rates.

California stuck out in the report as a continuing problem area. In the 12th district as a whole, which includes Idaho, Utah, Hawaii, Washington, and Oregon, sentiment among business leaders "has deteriorated since the first quarter of 1993," the report noted.

Loan Demand Weak

California financial institutions reported "continued weakness in loan demand" and a continuing decline in the already weak commercial real estate markets."

Similar findings were reported in most of the other western states. "A contact from Arizona reports a general reluctance to borrow and a lack of good lending opportunities," the report noted. "Loan demand in Hawaii is reported soft except for home loans."

But in Utah, "banking continues strong, with slightly heavier demand for commercial loans."

A Mixed Bag

Elsewhere in the country, reports on ban lending were mixed. Loan volumes increased in the St. Louis, Dallas, Cleveland, and Kansas City districts, but were flat in the New York and Philadelphia regions. Loan volume was down in the Richmond and California districts.

A bright spot was the real estate market, again with the notable exception of California.

"Sales and construction of single-family homes were reported to be on an upswing in southern and western parts of the nation, except for California," the report said. Nonresidential real estate activity was reported to be mixed. Office vacancy rates improved slightly in Boston, Minneapolis, New York, and Richmond.

Uncertainty Takes a Toll

The report also highlighted unease in the business community over President Clinton's budget and health care initiatives, noting that companies have delayed investment and hiring decisions because of uncertainties in those two areas.

"People are reluctant to make commitments when they think the government can pull the rug out from under them at any point," said F. Ward McCarthy, a principal in the Princeton, N.J.-based consulting firm of Stone & McCarthy.

Mr. McCarthy said he believes the Fed is likely to stand pat on interest rates for now, encouraged in part by the Beige Book findings. But the uncertainly over the President's programs, he added, "makes the Fed's job more difficult."

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