WASHINGTON - The Federal Reserve is unlikely to move quickly to tighten monetary policy in the wake of the weak report on economic growth issued Friday by the government, analysts said.
The Commerce Department said the economy grew at a puny 0.9% rate in the first quarter, revised down from last month's estimated gain of 1.9%. It was the slowest pace for gross domestic product growth in three years and a big comedown from the hearty growth of around 4% recorded in the last six months of 1992.
"The bottom line is that I think the Fed would find it rather difficult to tighten credit under these types of conditions." said Kevin Flanagan, a money market economist for Dean Witter Reynolds Inc. "They might be likened to the Bundesbank," which has a reputation for being tightfisted.
Market fears of a possible snugging in short-term rates were fanned by a television report last week that 10 of the 12 members of the Federal Open Market Committee voted to adopt a policy directive biased toward tightening. Coming after surprisingly high inflation reports for April, the report caused a sharp jump in bill rates.
Normally, a revision to a GDP report does not attract a lot of attention in the market. But analysts said the latest figures underscore how the economy is struggling.
"I don't think we're going to see much of anything in the money and bond markets," said Flanagan. "All of this frenzy about a Fed tightening has been put on the back burner for now."
David Wyss, sentor vice president for DRI/McGraw-Hill Inc., said "it would be totally idiotic" for Fed policymakers to increase rates now. "It would kill the economy" and jeopardize efforts by the Clinton administration and Congress to come to terms on deficit reduction legislation, he said.
The administration is believed to be facing a tough time with its economic plan in the Senate following the narrow victory eked out in the House after a lot of White House arm-twisting. Administration officials openly worry that interest rates will jump if the President's economic program is defeated.
The Commerce report showed that consumer spending, which accounts for two-thirds of GDP, slowed to a modest 1.2% in the first quarter after surging 5.1 % in the fourth quarter.
Other sectors of the economy contracted. Despite low interest rates, residential investment slipped 0.2%. The trade sector weakened as exports of goods and services fell while imports jumped, and government purchases plunged on falling defense outlays.
Business inventories bulged, which analysts attributed in part to an inability of stores to move merchandise during the March blizzard. Final sales, a measure of demand that excludes inventories, tumbled 1.2%.
Still, analysts remain guardedly optimistic that the economy will do better as the year unwinds. Dana Johnson, chief analyst of the capital markets group for First National Bank of Chicago, said some of the buildup in inventories was by car dealers expecting better sales. Dealers did in fact report an upturn in April sales, a fact noted by Fed Chairman Alan Greenspan last week during a visit to Dallas.
Recent economic indicators have been mixed, Johnson noted. Consumer confidence fell in May, and orders to factories for durable goods were flat in April, but there have been gains in sales of cars and existing homes.
Commerce Secretary Ronald Brown said in a statement that the GDP report "confirms our view that the economy is not growing fast enough to create new jobs."
The Labor Department s unemployment report for May is due out on Friday, and economists do not expect to see much of a change, if any, in the 7% jobless rate.
"Real economic growth is more sluggish than the Fed and administration would like," said analysts for CRT Government Securities Ltd. in a market letter to clients. "While the economic statistics for April indicate a general bounce from March, it is not a resounding rebound. The Fed would prefer remaining neutral as the administration's fiscal package moves through Congress."
