We need some more high-powered cash
OUTLOOK - FOMC seen holding rates steady, to maintain easing bias on Sept 24
-- by Greg Robb --
WASHINGTON (AFX) - Federal Reserve policy makers will hold rates steady and maintain their easing bias at their meeting next Tuesday, analysts said.
In their public comments since the last FOMC meeting on Aug 13, Fed officials have expressed confidence that rates are low enough to spur a recovery.
"They seem inclined to be patient," said James Glassman, senior economist with JP Morgan Chase.
Rus Shelton, economist at Nesbitt Burns, said Fed officials "have sent a strong message that absent clear and present danger, they aren't going to do anything."
Robert Brusca, economist with Ecobest Consulting, agreed. He said the underlying theme of comments he heard from Fed officials at their annual gathering late last month in Jackson Hole, Wyoming was that the Fed has done enough to spur the recovery.
"There is a lot of stimulus, they didn't think they needed to more," he said.
This viewpoint was best summed up by Michael Moskow, the president of the Federal Reserve Bank of Chicago, in a speech in late August. Moskow said the US recovery was bound to be bumpy and it wasn't the Fed's job to smooth it out.
The Fed has made it clear that it will only be prepared to cut rates if the economy gets weaker, analysts said.
And most economists do not believe the US economy has deteriorated since the last FOMC meeting on Aug 13.
Indeed, economists have been steadily revising upwards their growth rate forecast for the July-September quarter. Estimates now range anywhere from a 4.0-5.0% annualized growth rate in the third quarter.
"You can't tell me this economy is collapsing," said Joel Naroff, chief economist at Naroff Economic Advisors.
"We'll have growth rates of five percent, one percent and four percent," he said, referring to the path of growth so far this year and his third quarter estimate.
For now, there is not enough evidence of weakness for the Fed to do anything, analysts said.
"There is not enough for the Fed to do anything other than keep the same bias and make the same statements that they are still concerned about the extent of the recovery," Naroff said.
"They are probably going to say exactly what they said last time," after the Aug 13 meeting, Naroff said.
At that meeting, the FOMC adopted an easing bias in the wake of sharp stock market declines.
In their statement, the FOMC said "the softening in the growth of aggregate demand that emerged this spring has been prolonged in large measure by weakness in financial markets and heightened uncertainty related to problems in corporate reporting and governance."
But the statement went on to stress "the current accommodative stance of monetary policy, coupled with still-robust underlying growth in productivity, should be sufficient to foster an improving business climate over time. "
Analysts said that Fed chairman Alan Greenspan gave a clear sign of his intention to do nothing on Sept 24, when he declined to discuss the economic outlook in testimony to the House Budget Committee last week.
"He evidently did not feel the need to modify the message in the FOMC's Aug 13 statement, which acknowledged a shift in risks back toward economic weakness but revealed no urgency to cut rates," Goldman Sachs said in a note to clients.
Analysts acknowledged that there were still plenty of factors for the Fed to worry about.
"The problem is the economy is not growing fast enough to convince anybody that it's sustainable," said Glassman.
Jobless claims have remained above the key 400,000 level for four straight weeks, signalling a possible decline in Sept nonfarm payroll.
But other economists said there will be lots of cross currents in the economy when growth has been below par.
A new wave of refinancing will help provide another boost to spending in the fall, they said.
Another factor arguing in favor of the Fed holding rates steady is the increasing likelihood of military action against Iraq, Naroff said.
"The possible attack on Iraq hangs over everything," Naroff said. "It will freeze all action until its clear what is going on," he said.
Other analysts argued that a surprise rate cut might be interpreted by financial markets as a sign of panic at the Fed.
Brusca of Ecobest was the only economist to argue forcefully in favor of a Fed rate hike on the grounds that the world economic outlook is deteriorating.
"I think they are going to cut rates. The world environment is considerably bleaker, and in this world environment, the Fed has a clear duty to try and provide stimulus," Brusca said.
He pointed to fresh signs that growth is stagnating in Europe and the Bank of Japan's puzzling decision to buy billions of dollars worth of corporate stocks from the nation's banks.
"Europe looks like its in trouble," Brusca said, and the BOJ's decision to buy stocks "smells like there is something bad" known only to BOJ officials that has forced them to take the surprising step to buy stocks.
"We need some more stimulus," Brusca said. |
