FED WILL NOT RAISE RATE
Fed Seen Sitting Tight On Rates - For Now
By Knut Engelmann
CHICAGO (Reuters) - It is back to basics for the U.S. Federal Reserve -- growth at home and a nascent recovery abroad have the world's leading central bank focused once again on domestic inflation.
Still, Fed policymakers gathering for a crucial interest rate meeting this week are expected to leave borrowing costs unchanged -- at least for now -- as they wait to see if patchy evidence of rising prices will turn into broad-based inflation pressure.
Fed officials and economists at a Chicago Fed conference at the end of last week were reluctant to express their views on the future of interest rates that they have twice nudged up this year to keep inflation at bay.
But just two days ahead of Tuesday's rate meeting, that silence in itself was a signal: The Fed usually telegraphs its intentions well ahead of time to avoid out-sized reactions in financial markets.
A slew of benign inflation data over recent weeks and the lack of clear warnings from the central bankers' camp has the vast majority of Wall Street analysts convinced that no Fed move is imminent.
Only one of the 30 top trading firms polled by Reuters Friday said it expects the Fed to raise rates this week.
Those results came despite evidence Friday that the nation's manufacturers added power in September as orders and production climbed while robust consumer spending in August pointed to a quickening economic pace.
Those figures were the last official economic data that Fed officials will see before going into their closed-door meeting Tuesday.
ONE DAY'S DATA WON'T RATTLE FED
The news rattled U.S. stock and bonds prices as investors wondered whether the odds of a third increase in key interest rates this year had risen after all.
The Dow Jones industrial average fell 0.62 percent, bringing its decline since this summer's highs to almost 10 percent -- a drop big enough that Wall Street insiders would call it a market correction.
But veteran Fed watchers warned that one day's worth of data is unlikely to make much more than a difference in tone at the meeting of the Fed's Federal Open Market Committee.
``It'll be a bit of a closer call than it was before,' said David Hale, chief global economist at Zurich Group.
In fact, economists point out, clear-cut evidence of higher inflation is scant even as the economy booms in its ninth year of uninterrupted growth. Fed officials, led by Chairman Alan Greenspan, have singled out technology-driven gains in productivity for helping to keep a lid on wages and prices.
New York Fed President William McDonough, for one, believes the economy can grow by as much as four percent a year without generating inflation -- a rate few economists would have said is sustainable just a couple of years ago but one that roughly squares with most U.S. forecasts this year.
``As of this moment, it would appear that you can grow the American economy at essentially four percent per year and have that growth be sustainable,' McDonough said Friday.
Others inside the Fed may be more cautious. Among them is Governor Laurence Meyer, who told the Chicago meeting Friday that the central bank's prime mission should be to provide an anchor of strong, but non-inflationary growth for the world economy.
Yet Meyer also warned that the Fed would keep an eye on conditions in financial markets as a signal of the economy's health. That topic also been one of Greenspan's favorites.
``One takes into account what is going on in financial markets ... indirectly in terms of the impact it's having on the broad macro-economy,' Meyer said.
FED MAY MOVE LATER THIS YEAR
Looking at financial markets, the Fed can take some comfort in that high-flying stock prices have taken a drubbing and that yields -- the return on government bonds -- have risen.
The former should reduce fears of a speculative bubble, and the latter should help to slow the economy without the Fed doing so much as tapping the brakes.
But inaction this week by no means forestalls another rate rise later this year if evidence of rising inflation becomes more clear-cut, economists said.
``The data may not be compelling enough to move Tuesday but the economy is hot, consumer spending is very strong and the manufacturing side is strong with rising inflation pressures,' said Allen Sinai, chief economist at Primark Decision Economics Inc.
Thirteen of the trading firms polled by Reuters expect the Fed to shift to a so-called ``tightening bias' next week that would indicate they are leaning toward a rate hike as their next move. Seven firms predicted the central bank would raise rates at its next meeting, set for Nov. 16. |
