Fed Does As Expected, Leaves Interest Rates Steady

Despite the lowest unemployment level in nearly a quarter-century, the Federal Reserve decided on Tuesday there was no urgent need to boost interest rates to dampen inflationary pressures.

The Fed’s decision had been widely expected, given recent comments by Federal Reserve Chairman Alan Greenspan about the “exceptional” combination of low unemployment and low inflation the economy is enjoying.

The Fed decision extended this week’s rebound on Wall Street. The Dow Jones industrial average closed up 114.74 points at 7,918.10 after a 108-point gain on Monday.

But the market euphoria may be short-lived. Some economists suggested the Fed may start raising rates as soon as its next meeting on Sept. 30 as evidence mounts that tight labor markets are finally showing up in rising wage demands and higher inflation.

Analysts said the settlement reached between United Parcel Service and its drivers after a 15-day strike could be the first sign of this rising pressure, and that it had to attract the attention of Fed policymakers during their discussions.

“We had an unusual amount of publicity that accompanied the UPS strike and it looks like the union won on almost all counts,” said David Jones, chief economist at Aubrey G. Lanston & Co. in New York. “This may cause a lot of workers to decide that in this time of tight labor markets, they too deserve increased benefits and higher wages.”