Fears that higher interest rates would shadow bank stocks vanished Thursday after fresh economic data showed minimal inflation. Still, some economists remain wary.

The relief came after the Labor Department said its employment cost index had risen only 0.7% in the first quarter. Meanwhile, the Commerce Department said in gauging economic growth that price inflation had been nearly nil during the quarter.

But Robert G. Dederick, economic consultant to Chicago's Northern Trust Co., pointed to "the tendency of fringe benefit costs to be lower in first quarters, for reasons not entirely clear."

In fact, viewed on a year-over-year basis, employment costs were up 3.3%, versus 2.7% in the previous 12 months, he said.

"This amounts to a gradual and irregular but to me discernible uptrend in labor costs," he said. "Nothing to stir panic among bond marketeers but nonetheless something to create a touch of unease for Federal Reserve officials."

The Fed's monetary policy committee next convenes May 19 to evaluate business conditions and ponder interest rates.

Mr. Dederick said the striking contrast between the upturn in employment costs now versus previous economic cycles is the inability of business to raises prices, meaning wage inflation does not become price inflation.

But that means corporate profits are being squeezed, said Lacy Hunt, an economist and partner in Hoisington Management, Austin, Tex.

While first-quarter employment costs increased at a 2.8% annual rate, domestic prices were flat for the first time in 44 years, with business profitability caught in the middle, he said.

Still, the employment cost data had been widely expected to be worse. Most economists had anticipated a one-percentage-point quarterly rise, matching the fourth-quarter increase.

"This is one time I was delighted to be wrong," said Nicholas S. Perna, chief economist at Fleet Financial Group, Boston. "If the number had come in at 1% or above, it would have meant we were at a 4% going rate."

The lower rate "doesn't mean we're out of the woods," he said, "but it does mean less pressure on" Fed chairman Alan Greeenspan. "It buys time for the Fed" to await an economic slowdown in the second half of the year as a result of Asia's financial crisis.

At any rate, with such benign inflation data, it would be difficult and politically unpalatable for the Fed to tighten monetary policy at its May 19 meeting, he said.

The next subsequent policymaking session is scheduled for June 30.

"The Fed is still looking to raise rates, but these figures aren't going to be the trigger," said Scott J. Brown, economist at Raymond James & Associates, St. Petersburg, Fla.

Looking ahead, the first peek at the second quarter will come Friday, when the April employment report is released. "Ideally, the Fed wants to see monthly job growth around 125,000 but could probably stand 200,000 to 250,000," Mr. Perna said.

The Fed is in the unenviable position of having to sit tight and wait to see whether it is right about a slowdown, Mr. Dederick said.

"As someone said, it's rather like Ma and Pa upstairs while daughter and her boyfriend are downstairs," he said. "The Fed has to remain alert but at the same time avoid going downstairs and turning on all the lights."

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