Fed Seen Leaving Interest Rates Steady
Wednesday January 31, 8:45 am ET
By Martin Crutsinger, AP Economics Writer
Analysts Say They Don't Expect Federal Reserve to Alter Interest Rates at End of 2-Day Meeting
WASHINGTON (AP) -- Since Federal Reserve Chairman Ben Bernanke and his colleagues last met, an economic sea change has occurred that has left financial markets glumly contemplating the central bank's next moves on interest rates. Analysts don't expect the Fed will change rates when policymakers wrap up their two-day meeting on Wednesday. But they are braced for the possibility of rate increases later this year, a far cry from the rate cuts they had been expecting just a few weeks ago.
Since the Fed's last meeting Dec. 12, the economic news has been uniformly good, with job growth stronger than expected, energy prices dropping and the overall economy navigating the rough waters of a severe housing slump.
In the latest better-than-expected news, the government reported Wednesday that the overall economy, as measured by the gross domestic product, grew at a solid annual rate of 3.5 percent in the final three months of last year in spite of a serious drag from the slumping housing market.
Many analysts have gone from forecasting that the Fed would cut rates possibly three times this year to thinking that the most likely outcome is that the Fed will leave rates steady for a considerable period.
"Some were expecting rate cuts as early as March and now it is possible the Fed will keep the federal funds rate unchanged for the rest of the year. That is the harsh reality that the markets are now facing," said David Jones, chief economist at DMJ Advisors, a Denver-based forecasting firm.
Such an outcome would mean that banks' prime lending rate, the benchmark for millions of consumer and business loans, will remain at 8.25 percent.
The Fed last changed rates back in June when it pushed the federal funds rate, the interest that banks charge each other, up to 5.25 percent.
It marked the 17th consecutive meeting that the central bank had nudged rates up by a quarter-point. Before the Fed started raising rates in June 2004, the funds rate was at 1 percent and the prime rate stood at 4 percent, both the lowest levels in more than four decades.
After raising rates in June, the Fed left the funds rate unchanged, hoping it had done enough to engineer a "soft landing" in which the economy slows and inflation pressures are lowered but the slowdown doesn't deepen into a recession.
For a time, recession worries were on the rise as analysts worried that a severe slump in the housing market might be enough to bring on a downturn. Economic growth slowed to just 2 percent at an annual rate in the summer.
Many expected growth would remain at that lackluster pace or perhaps dip even further in the final three months of the year.
However, with a string of stronger-than-expected results in recent weeks on jobs, consumer spending and manufacturing, the economy rebounded in the final three months of the year to the 3.5 percent growth rate reported on Wednesday.
Many economists believe that all the signals are flashing that Bernanke, wrapping up his first year as Fed chairman, is close to achieving a soft landing.
"If we have a soft landing, there is absolutely no reason for the Fed to lower interest rates and the only question is will we get enough progress on inflation to keep the Fed from raising rates," said Lyle Gramley, senior economic adviser at Schwab Research Group, a financial services firm.
Most economists believe that whatever changes the Fed makes will not occur until midyear, allowing the central bank more time to assess incoming economic data.
Mark Zandi, chief economist at Moody's Economy.com, said he still believed the economy will have slowed enough and inflation retreated enough to let the Fed cut rates in the second half of this year.
"I am still expecting the Fed to ease a couple of times this year, but not until the summer or fall," Zandi said. "But I say that with a lot less conviction than I did six or eight weeks ago when the economy was clearly weaker."
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