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Pacific Stars And Stripes (Newspaper) - May 20, 1997, Tokyo, JapanPACIFIC STARS AND STRIPES TUESDAY, HAY 20,1997 19 * The only thing worse than the Fed's raising rates next week may be not to raise rates. The New York Times ' Witt the Fed just wait? That's the nagging question" for investors ahead of Tues- day's meeting jof the. Federal Reserve's policy-making com-mittee. Indeed, for many on Wall Street, the only thing worse than the Fed's raising rates this week is the Fed's deciding not to raise rates. Why? Since many investors believe that at least one more rate increase" this year is inevitable, it makes sense to them to get it out of the way now. In contrast with March, when analysts were overwhelmingly convinced that the central bank would raise short-term interest rates rather than hold them steady, sentiment on Wall Street is split .about what the Fed will do. Inflation is practi- cally nonexistent, and the ro- bust growth of the first quarter appears to be fading — reasons for the Fed to hold off. But if the Fed leaves its -tar- get rate at S.5 percent Tuesday, uncertainty may dog the finan- cial markets and stocks and bonds are more likely to experi- ence sharp ups and downs this summer, extending the roller-coaster ride of recent months. "It makes for a more-uncer- tain market and, therefore, the possibility of a more volatile market," said Richard Berner, the chief economist at the Mel- lon Bank in Pittsburgh. Unless the economy slows much more than expected, ev- ery new economic report will be scoured for hints of what the Fed's policy-makers will do when they gather again in July. And given titie erratic nature of a lot of the government^ statis- tics, markets could be in for some wild swings. What would be especially to%h is a string of economicreports indicating that the slow- down in consumer spending in April was simply a pause rather File photoFed Chairman Alan Greenspan, SeSt, who met with Chinese President Jiang lemin in Beijing last week, will be on center stage Tuesday when Federal ieserve governors meet to discuss interest rates. than a genuine downshift in the exuberant pace earlier this year. Traders would conclude that the economy was too strong for the Fed to feel confi- dent that inflation would re- main under control, reversing the sentiment underlying the recent rally. Interest ratei would mdve higher and stock prices lower. With a rate increase this week, the outlook would be dif- ferent, even if stocks and bonds tumble initially. On one hand, if the slowdown is confirmed in economic re- ports for May and June, then a Fed rate increase this week would clear the way for a mar- ket rally. With two Fed rate in- creases already in the bag, in- tvestors could fairly conclude that the central bank would wait quite a while before actingagain. '"• On the other hand, even if the economic news turns out to be less comforting to Wall Street, the Fed's back-to-back rate in- creases would help squelch speculation that the central bank would try a third rate in- crease so soon. And the confi- dence that the Fed was ahead of the curve would help cushion anyfall. The Fed, of course, has to take a lot more into account than just the markets. And per- haps the biggest force weighing against an immediate rate in- crease is the one Fed officials never like to talk about: politics. The criticism of the Fed from politicians and commentators has been sharp enough since its quarter-point increase" in March that Alan Greenspan, the Fed's chairman, went out of ,his way recently to deliver an unusually detailed defense of the central bank. The sniping would certainly increase if the Fed lifts rates again this week, especially because it is so hard to persuade elected officials of the need to act before a new inflationary surge is detectable. "Launching a pre-emptive strike against inflation has to be difficult in any political con- text," Berner of the Mellon Bank said. The Fed wants to be pre-emptive but not premature. "If the Fed is premature," he said, "it erodes its public sup- port and its political support for what they do and their inde- pendence," Moreover, the underlying economic rationale for a rate increase, in the eyes of some Wall Street economists, has weakened in recent weeks. Wil- liam Dudley, 'the chief U.S. economist at Goldman, Sachs & Company, just changed his view Thursday, saying that "the odds favor the Fed standing pat." "Citing the Fed's decision last summer not to raise interest rates despite a burst of growth in the sprjng, Dudley said that Greenspan "has shown a will- ingness to be patient when the economy is slowing." Indeed, even analysts who lean toward a rate increase ac- knowledge that the Fed has plenty of reasons to be patient. The Producer Price Index has fallen four months in a row, in- cluding a 0.6 percent decline in April. The Consumer Price In- dex is up just 2.5 percent in the last 12 months, while the more closely watQhed Employment Cost Index rose less than 3 per- cent. The decline in April retail sales is also a sign that the op- portunity to raise prices re- mains limited. And the bal- anced-budget agreement in Washington helps ease fears. The Fed has already moved once this year to brake the economy by raising its federal funds target — the rate banks charge one another for over- night loans. But Bothers contend that the weight of evidence tilts slightly in the other direction. They start with the exceptionally low unemployment rate. Since last May, it has dropped to 4.9 per- cent from 5.5 percent. Although most experts applaud an econo- my capable of generating jobs for almost everyone who wants one, the fear is that the jobless rate is so low that it is just a matter of time before inflation- ary pressures bubble over. The 5.3 percent average un- employment rate for the last 12 months is the lowest since the year ended February 1990, when inflation was clearly on the rise and the economy was only a few months from falling into recession. Other than that brief period, unemployment has not been so low in nearly a quarter of a century. :.Ny' As for real growth, which has averaged about 4 percent in the last year, the economy has not expanded at such a rapid pace for a full year since 1987. Be- fore that, the last three quarters of 1984 and the first of 1985 added up to another strong year. But at that time the elson- omy was still rebounding from the severe 1981-82 recession and labor markets were not tight Unemployment averaged 7.4 percent and was still at 6.2 percent in 1987. So for all the talk p/a new economic era, it is no surmise that Greenspan is worried that conditions today are simply too good to last. In defending the Fed's March 25 raje increase in his speech recently, the Fed chairman said the move was "taken not so much as a conse- quence of a change in the most probable forecast of moderate growth and low inflation for latx er this year and next, but rather to address the probability that being wrong had materially increased." % „ ... To Robert Barbera, the chief economist of Hoenig & Co., that means the Fed's job is "to make . sure that growth isn't so brisk over the next 12 months that it lowers the unemployment rate," But even with that in mind, he says, this week the Fed could still leave Wall Street waiting; V < .: :'.'-. ; "- ,••••.'•• Lockheed Martin largest defense contractor again The Associated, Press WASHINGTON — Lockheed Martin Corp. remained the na- tion's largest defense contractor for a second year in a row, the Pentagon said Friday. The Pentagon's annual listing of major defense contractors showed that Lockheed had $12 billion iir contracts in 1996, up from $10.5 billion the previous year. The figures cover the fis- cal year that ended Sept. 30. McDonnell Douglas Corp. re- tained its No. 2 position with $9.9 billion in contracts. Lockheed beat out McDon- nell Douglas for first place last year after the new corporation materialized hi a merger of Lockheed Corp. ,and Martin Marietta Corp. Lockheed Martin, based in Bethesda, Md., makes a wide range of military hardware, in- cluding Trident and Hellfire missiles, the C-5 Galaxy trans- port plane, the F-16 Falcon and F-22 Raptor fighter jets; and communications gear for de- fense satellites. McDonnell Douglas, based in St. Louis, makes the Navy's F- 18 Hornet fighter, the Air Force's F-15 Eagle fighter, the C-17 transport; and the Army's Apache helicopter and missiles, including the Tomahawk and Harpoon. General Motors Corp, of De- troit rose from fourth to third place with $3.2 billion in con- tracts, up from $3 billion the year before. It produces power transmis- sion components for the Army's Abrams tanks and other parts for Bradley Fighting yehicles, as well as other missiles and aircraft parts. In fourth place was Raytheon Corp. of Lexington, Mass., mak- er of the Patriot air defense sys- tem and other missiles as well as defense electronics, with $3 billion in contracts. One big gainer was General, Dynamics Corp. of Falls Church, Va.,n maker of Abrams tanks, Seawolf attack subma- rines, Aegis destroyers and Stinger and Tomahawk mis- siles. General Dynamics rose from llth to fifth place, with $2.7 billion in contracts, up from $1,7 billion. Filling out the top 10 were: .6. Northrop Grumman, Los Angeles", whose products in- clude the B-2 stealth bomber and tiie MX missile system as well as defense electronics: $2.6billion. 7. United Technologies Cbrp., Hartford, Conn., maker of mili- tary aircraft engines and com- ponents, helicopters and de- fense electronics: $2.6 billion. 8. The Boeing Co., Seattle, which makes numerous mili- tary aircraft: $1.7 billion. . 9. Litton Industries Inc., Woodland Hills, Caiif.,*maker of Aegis destroyers, ships and oth- er aircraft: $1.7 billion. / 10. General Electric Co., Fairfield, Conn,, which makes many aircraft engines and mis- sile components: $1.5 billion. ;