Economy, scandals may keep Fed from raising rates
Mon Jul 1, 6:29 AM ET
Barbara Hagenbaugh, USA TODAY
WASHINGTON -- In the wake of the latest business scandals, a growing number of economists expect the Federal Reserve ( news - web sites) will leave interest rates unchanged at their current 40-year low for the rest of the year, keeping it cheap for consumers to buy homes and run up their Visa bills.
''The Federal Reserve clearly does not want to touch the dials right now,'' says Paul Kasriel, chief economist at Northern Trust, who says it's a ''coin flip'' whether the Fed tightens this year.
That's quite a shift from the start of 2002, when most analysts thought Fed chief Alan Greenspan ( news - web sites) would have started raising rates by now.
What's changed?
* Scandals. Brouhahas, such as the Martha Stewart stock trade controversy and the WorldCom accounting fiasco, have shaken nerves around kitchen tables and corporate boardrooms across the USA. That's causing chaos on Wall Street, which may lead to a decline in business and consumer spending -- the bedrocks of the U.S. economy.
''It would take one hell of a stock market rally from here to get them to do anything anytime soon,'' says Greg Valliere, managing director at Schwab Washington Research Group.
* Gloomy CEOs. Executives have been unable to shake their bad moods despite encouraging economic data. That means companies are less likely to invest in their businesses and hire new workers, two key factors that are important for the economy's health and that have been soft thus far in 2002.
* No inflation. Price pressures have been a no-show this year and are at their lowest in decades. On Friday, the government reported that Greenspan's favorite inflation measure, the personal consumption expenditures index less food and energy, was unchanged in May and was up just 1.6% from a year ago. An inflation rate that low gives the Fed time to watch how the economic recovery plays out.
* The Fed schedule. After leaving rates unchanged last week, the Fed will meet four more times this year: Aug. 13, Sept. 24, Nov. 6 and Dec. 16. Just about every economist says the economy is too weak to raise rates in August. The November meeting comes one day after the U.S. election, and Republican Greenspan would be opening himself up to criticism that the Fed delayed raising rates until after the election to help the GOP.
The Fed is not expected to start raising rates in the holiday month of December, either. Just think of the political cartoons of Greenspan tearing the reins away from Santa Claus.
That leaves September. While many analysts say a hike in September is possible, others note the economy may still be too uncertain and the closeness to Sept. 11 would make it inappropriate.
''I just can't see commencing a tightening program in an atmosphere of public mourning,'' says Neal Soss, chief economist at Credit Suisse First Boston. |
