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Fed likely to keep

interest rate unchanged

thru elections

NEW YORK: The Federal Reserve is likely to keep interest rates unchanged through the U.S. presidential elections in November, a source at the central bank said on Friday.

"The situation has certainly changed," the source said, referring to the current economic and inflation picture compared to that of earlier in the year.

"The first quarter seemed to have started on a weak note. But it turned out that growth picked up later in the quarter, which will be pretty strong, maybe above trend," the source said this week.

Preliminary estimates by private forecasters for first quarter Gross Domestic Product growth range from a 1.3 percent to a 2.9 percent annualized pace, with the bulk of the estimates at 1.5 to 2.0 percent.

The Commerce Department will release the government's first estimate of first quarter growth next Thursday.

"If growth remains around potential, or around 2.0 percent, and inflation remains around current levels, there is no urgency for the Fed to do anything over the next six months, meaning the Nov. 13 meeting, which will be the first one after the elections," the source added.

Inflation as measured by the retail price gauge, the Consumer Price Index, is running at a 2.8-percent annual rate, according to the Labour Department.

The source said Fed officials were divided over the longer-term economic and inflation outlook, with one camp fearing wage-related inflation pressures and the other concerned about the impact of higher long-term interest rates.

"There is no definitive case, at the moment, to indicate in what direction the rates will go," the source added.

Aubrey G. Lanston and Co. Inc. chief economist David Jones said he agreed the Fed is on hold until after the November presidential elections. But he expects the central bank's next move to be a tightening of credit policy.

"The Fed is looking at higher wage and oil pressures. Those two forces together are likely to result in price increases that will stick," Jones said.

Jones added that Fed Chairman Alan Greenspan has indicated "the balance of risks between an economic downturn and higher inflation is about equal."-Reuter