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To: Les H who wrote (5254)	1/29/2003 12:03:48 PM
From: Softechie	Read Replies (1) \| Respond to of 29601

FED WATCH: FOMC In A Pickle Over Its Policy Message 29 Jan 10:06 By Michael S. Derby Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--The Federal Reserve is facing some tough going on the communication front. The central bank will on Wednesday wrap up a two-day policy meeting in which there's an unanimous view that it will leave interest rates unchanged, as it did at the last Federal Open Market Committee gathering on December 10. With so little drama surrounding the direction of interest rates, Fed watchers say all eyes will instead be on the so-called "balance of risks" statement, where the central bank signals how weak or strong it believes the economy is. Most economists expect the Fed, as it had done since the Nov. 6 interest rate cut, to continue to state the risks to the economy remain balanced. Only a small minority of bank economists argue that the Fed will say the risks to growth have worsened. But there's a gulf between what economists think the Fed will do and what they believe is the actual state of the economy. Indeed, most observers argue that the risks between growth and inflation aren't balanced. They note that the economy is unambiguously facing major challenges from the uncertainty created by the rising chance of war with Iraq, battered equity markets and the still dismal state of hiring. But if the Fed acknowledge that by saying risks are now to the downside, that would lead both forecasters and markets alike to bet the central bank's next move would be to cut interest rates, perhaps more than once. That, at least at this point, is something the Fed doesn't want, most economists agree. The majority of forecasters at Wall Street's biggest banks expect the Fed will be on hold until the middle of the year. Most agree that once uncertainty created by Iraq has lifted, the economic landscape should improve enough for the Fed to actually raise rates later in the year. "The Fed does have a problem" in how people are viewing its policy stance, said Drew Matus, an economist with Lehman Brothers in New York. While Lehman supports a cut in the fed funds rate to 1.00% at the March meeting, Matus said from his vantage point a move toward a more negative economic assessment now would suggest more than one rate cut is coming, something that's unlikely. Too Much Information The Fed's current pickle has precedent. Since it began publicizing the outcome of its meetings in 1994, the Fed has been on a long and slow process of increasing the amount of information it gives the public about its decisions and future inclinations. As this process unfolded, the Fed also began divulging what was known as a "bias," namely, a disposition to move interest rates at some point at the future. A symmetrical balance signaled steady policy, while a tightening bias signaled rates were poised to go up, and an easing bias signaled rates were more likely than not to go down. But the Fed was dissatisfied with how markets interpreted the bias statement and after a review led by Fed Vice-chairman Roger Ferguson, in early 2000 the central bank moved to the "balance of risks" regime that it currently operates under. Some believe the Fed will find the wiggle room it needs in the statement by maintaining its balanced assessment, but will play more strongly adverse factors in the language of the statement. "The statement has got to acknowledge the fact that they are seeing weaker labor conditions and some softness in consumer spending, and reconfirm the fact that business spending remains sluggish at best," said Sharon Stark, a fixed-income strategist with Legg Mason in Baltimore. But those comments will be balanced with positive commentary about price pressures and the still-hot pace of productivity gains the economy continues to enjoy, Stark said. -Michael S. Derby, Dow Jones Newswires; 201-938-4192; michael.derby@dowjones.com (END) Dow Jones Newswires 01-29-03 1006ET