Fed Seen Ending Rate Cuts, Retaining Weakness Outlook
from Bloomberg
By Brendan Murray
Washington, Jan. 30 (Bloomberg) -- Federal Reserve policy makers are likely to leave the benchmark U.S. interest rate unchanged today and may give investors clues about the how long they plan to keep borrowing costs at the lowest level in 40 years, analysts said.
Fed Chairman Alan Greenspan and his fellow central bankers will keep the target rate on overnight loans between banks at 1.75 percent, the lowest since July 1961, according to 62 of 68 analysts surveyed by Bloomberg News. The other six expect a quarter percentage point cut. If the Fed acts as expected, that may bring an end to a series of 11 interest rate reductions over the past year.
Policy makers are also likely to say in a statement accompanying their decision that the economy faces a risk of additional weakness and that a recovery isn't assured, analysts said. That would leave open the door to additional reductions and limit expectations for rate increases later in the year.
``Fed officials will be very slow to tighten,'' said William Dudley, chief economist with Goldman, Sachs & Co. ``Not only does this reflect our view that the recovery will be moderate, but also a judgment that the Fed will be patient.''
The meeting of the Fed's policy-setting Open Market Committee started at 9 a.m. and an announcement of its decision on rates is expected at about 2:15 p.m.
No Change in Statement
Economists say the committee won't alter the view adopted in December 2000 -- and kept throughout last year -- that the economy is at risk of weakening in coming months. ``The FOMC will not likely want to jolt the market with too big a shift in policy,'' Dudley said. Changing their statement about risks to the economy ``might heighten fears'' that rate increases are imminent, he said.
Last year's rate reductions were the most aggressive in Greenspan's 14-year tenure at the Fed, lowering the overnight rate by 4 1/4 percentage points. Last week, Greenspan told Congress he sees the beginnings of a recovery.
The number workers filing new claims for jobless benefits fell a week ago to a six-month low. Consumer optimism, as measured by the Conference Board, rose this month to a five-month high. And orders for U.S. durable goods rose 2 percent in December, the second increase in three months.
``There will no doubt be some members leaning toward taking out one more insurance policy -- and I would include Greenspan in that camp -- but my reading is that most of them would be content to leave policy unchanged,'' Charles Lieberman, chief economist at Advisors Financial Center in New York.
Change in Tone
This week's rate decision comes after Greenspan delivered mixed messages this month about his degree of confidence in a recovery. At a speech in San Francisco on Jan. 11, he said the economy faces ``significant risks in the near term.''
Last Thursday, in testimony to the Senate Budget Committee, he said he wanted to ``rectify'' investor interpretations that his earlier remarks had been intended to suggest the economy wasn't yet turning. In his testimony, which echoed the Jan. 11 speech in part, Greenspan dropped his warning about risks.
Following Greenspan's change in tone, investor expectations reversed. On Jan. 14, the implied yield on the February fed funds futures contract -- tied directly to this week's meeting -- fell to 1.59 percent. That suggests many investors were betting on a 12th cut in the overnight rate to 1.50 percent. Yesterday, the yield on the February futures stood at 1.73 percent, suggesting expectations of a rate cut had vanished.
Investors are beginning to look for signs the Fed will raise rates to guard against a too-rapid recovery that might cause inflation to accelerate. The yield on the July fed funds futures stood yesterday at 2.05 percent, suggesting investors expect a quarter-point rate increase by midyear.
New Faces
Debate among Open Market Committee members will be different this year, with several new voices heard and old ones gone. The Fed's seven-member Board of Governors, which has had two empty seats since Rivlin resigned in July 1999, is still short-handed.
Governors Laurence Meyer and Edward Kelley have stepped down. And two bankers, Mark Olson and Susan Bies, who attended their first interest rate policy meeting in December, have joined the board. Neither is a career economist. Along with Greenspan, Vice Chairman Roger Ferguson and Governor Edward Gramlich remain.
The Open Market Committee also includes the 12 regional Fed Bank presidents, five of whom have votes at one time. New York Fed president William McDonough always votes, and the remaining 11 presidents rotate voting membership annually.
New voting members this year are Anthony Santomero, president of the Fed Bank of Philadelphia, Robert McTeer, president of the Fed Bank of Dallas, Jerry Jordan, president of the Fed Bank of Cleveland, and Gary Stern, president of the Fed Bank of Minneapolis.
Greenspan's Influence
With all the seat changing, Greenspan probably wields more influence than less, analysts said.
``For the new members, the gumption they might have to disagree with Greenspan hasn't exactly reached its zenith,'' said Carl Tannenbaum, chief economist with ABN Amro North America Inc. in Chicago. ``You don't walk into a classroom and disagree with the teacher who has 20 years of experience.''
Still, a unanimous vote to keep rates unchanged isn't guaranteed, economists said. Earlier this month, Santomero warned that rising unemployment may put a damper on consumer spending and delay the recovery. The unemployment rate in December rose to 5.8 percent, the highest in 6 1/2 years.
At the same time, many U.S. companies that closed factories and fired workers last year to preserve profits are beginning to see business come back.
Wal-Mart Stores Inc. expects this month's sales to rise as much as 6 percent. Amtran Inc.'s American Trans Air is recalling laid off workers as travel picks up. And General Motors Corp. raised its fourth-quarter production plan by 15,000 vehicles after zero-percent financing offers boosted sales.
``It would be both a huge surprise'' if the Fed cut rates again, Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, New York. Indicators suggest a recovery is under way, ``rendering further stimulus unnecessary at best and potentially dangerous at worst,'' Shepherdson said.
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Best Regards, J.T. |
