forbes.com
Fed to stand pat on U.S. interest rates
Reuters, 01.25.04, 9:58 AM ET
By Alister Bull
WASHINGTON, Jan 25 (Reuters) - Disappointed by weak December payrolls data, the Federal Reserve will hold interest rates steady at a 45-year trough this week and restate its view that they can stay low for some time to come, economists say.
At the end of a two-day meeting on Wednesday, the policy-making Federal Open Market Committee is expected to reiterate an assurance that policy accommodation can be maintained for "a considerable period" to bolster self-sustaining growth.
Reuters' latest poll sees the overnight rate the Fed controls edging up from 1 percent, where it has been since June, to 1.5 percent by the end of 2004. But some economists would not be surprised if it stayed pat for a year
"The Fed can be very patient. There is not one thing it needs to do here at all ... we are potentially a year away" from the first rate hike, said Dana Johnson, head of research at Banc One Capital Markets Inc.
Fed officials have stressed inflation remains well under wraps thanks to slack in the economy, despite a stellar third quarter in which the economy advanced at an 8.2 percent annual rate, the fastest in nearly 20 years.
SCANT NEW JOBS
While a long slide in employment drew to an end in July, only 278,000 jobs have been created since then and just a scant 1,000 December. Economists say jobs growth of about 150,000 is needed each month just to keep pace with population growth.
In addition, much of industry still lays idle over two years after the United States climbed out of recession.
A weakening dollar -- down another 5 percent since the last FOMC meeting on Dec. 9 -- gives officials something to think about. Still, they keep emphasizing that the dollar's drop has not hurt the economy so far.
Fed Chairman Alan Greenspan showed little concern at the currency's weakness when he told bankers in Berlin on Jan. 13 that it did not appear to be igniting inflation.
"Inflation, the typical symptom of a weak currency, appears quiescent," he told a Bundesbank seminar.
Greenspan will speak again on Feb. 11 when he delivers bi-annual testimony on monetary policy before the House of Representatives Financial Services Committee.
WHAT'S CHANGED
Some Fed officials have expressed surprise that December did not show more jobs growth despite ample evidence the economy is growing strongly, but analysts say this won't prompt a strong reaction from the policy-setting committee.
"It is not in their best interests to tweak their statement on the basis of one month's numbers," said Carey Leahey, senior U.S. economist at Deutsche Bank Securities Inc in New York.
Since the last FOMC meeting, a steady trickle of good economic news has been overshadowed by the weak jobs report, which was a blow to widespread hopes growth would have given more of a lift to employment by now.
But Fed officials have argued against putting too much store in one month's number and have taken note of contradictory evidence offered by other employment data, including an unemployment rate that fell to 5.7 percent in December, well off its recent peak of 6.3 percent in June.
Inflation also remained mute with consumer prices posting a 0.2 percent rise in December, while core prices, excluding volatile food and energy, rose just 0.1 percent.
The core rate has risen just 1.1 percent over the past 12 months, matching the advance through November as the slowest in just under 38 years.
In addition, retail sales undershot forecasts with a 0.5 percent rise last month, half of the gain seen in November.
But housing starts rose a better than expected 1.7 percent last month to close out the best year since 1978 as low interest rates spurred the sector.
"Our house view is for a (quarter percentage) point rise in June but I think that the chances of them not doing anything at all this year are about 40 percent," said Leahey.
Copyright 2004, Reuters News Service |
