They said most companies had little ability to raise prices because of intense competition and had proved determined to absorb cost increases by increasing their efficiency. But economists on Wall Street said the Fed was doing the right thing to fight inflation before it took root because price stability has been the foundation on which the long expansion has been built. As it has for the last several years, the Fed's Federal Open Market Committee came into today's meeting facing a raft of somewhat contradictory economic data. Although it slowed in the second quarter and faces potential trouble from a rapidly expanding trade deficit and a weakening dollar, the economy appears to have regained momentum over the summer. Industrial output last month rose to its highest rate in more than a year.
Housing starts remain strong and retail sales are robust.
Demand for imports was strong, and rebounding economies in Asia and Europe mean better prospects for exporters. With growth strong, job creation has remained brisk, and wages rose last month at a pace that while gratifying to workers was seen by some economists as the first signs of a possible inflationary spiral. Alan Greenspan, the Fed chairman, has repeatedly focused in his public comments on the depletion of the labor pool and the possibility of an excessive surge in wages as the most immediate inflationary threat to the economy. Still, inflation by nearly all measures has remained controlled, if not dormant, leaving the Fed in the position of fighting what critics consider a phantom menace. The Fed has had to weigh several other tricky issues in setting policy.