DOW JONES NEWSWIRE:
FED WATCH: Economists See FOMC Warning Of Economic Risks
By Michael S. Derby of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--The meeting Tuesday of Federal Reserve policy makers will almost certainly see the central bank hold interest rates steady and warn that risks to the economic outlook have clearly worsened.
But for many in financial markets, the Federal Open Market Committee gathering, which usually commands a central focus for investors, will be overshadowed by the near certainty of war in Iraq in the next several days.
Indeed, it is the war and what the anticipation of it has done to the economy that's been the central bank's prime bogeyman for many months now. Fed officials have repeatedly blamed the current sluggishness in the economy on uncertainty related to a potential war to disarm Iraqi leader Saddam Hussein.
They've argued the impending conflict is causing business to hold back on investment and trim payrolls, while making consumers reluctant to spend. Echoes of that uncertainty have been seen in a manufacturing sector where output is barely growing, a labor market that lost 308,000 jobs in February, and in falling retail sales.
Normally, such an ugly confluence of events would be a green light to cut interest rates, even as those rates are already grazing historical lows and are coming dangerously close to hitting a bottom. But the source of the weakness in the economy this time around is making Fed officials confident they can wait, in the belief that things will get better once the war passes.
As a result, the majority of primary dealers - banks that deal directly with the Fed - expect the central bank to stick to its current 1.25% fed funds target rate, a level many think will hold for a number of months. Most also believe the Fed will at least give a nod to the soggy economic environment by warning risks to growth are clearly growing.
The meeting "is about the playing out of the scenarios (Alan) Greenspan has talked about" for some time, said Charles Lieberman, an economist at Advisors Financial Center in Suffern, New York. "It's going to be impossible to discern what other things are holding back the economy" with the war looming, so the central bank will for now simply stand aside, he said.
Rising Risks
Most observers believe the Fed will note its concerns by flagging the adverse impact of rising energy prices and the Iraq war.
As such, many Fed watchers expect to see the FOMC break out the same "oil price premiums and other aspects of geopolitical risks have reportedly fostered continued restraint on spending and hiring by businesses" wording used in the statement accompanying the meeting that ended on Jan. 29.
Even though there's a strong consensus for the central bank holding steady, some heavy hitters think the Fed will cut rates again Tuesday, and they include J.P. Morgan Chase and Merrill Lynch. Wrightson ICAP economists had until last week predicted a 25 basis point easing, but took back that call Monday after the Fed refrained from sending any of its normal signals that action is possible.
Economists at Lehman Brothers don't think the Fed will ease Tuesday. But they do believe a half percentage point rate cut will come during April, outside of a regularly scheduled meeting. It will be followed by another quarter percentage point cut at the May meeting, to leave the funds rate at 0.50%, they argued.
While Lehman is alone in that call, many Fed watchers believe the central bank will guard against adverse economic and war developments by saying in Tuesday's statement that it will be "closely monitoring" events. That's Fed code that leaves open the possibility of an intermeeting rate cut.
Economists' views on the outcome of the Fed meeting differ somewhat from financial markets. While expectations have faded back in recent days, fed funds futures contracts see around a one-third chance of a rate cut Tuesday, and much stronger odds for easier policy in the months ahead.
"There's probably less conviction about the various choices the Fed has" among economists and the market, and that explains the somewhat fractured expectations, said Jim Glassman, economist with J.P. Morgan Chase in New York.
-Michael S. Derby, Dow Jones Newswires; 201-938-4192; michael.derby@dowjones.com
(END) Dow Jones Newswires
03-17-03 1645ET- - 04 45 PM EST 03-17-03 |
