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Economists say low interest rates could last until late summer

Tuesday, January 28, 2003

WASHINGTON -- Americans who have been treated to the lowest interest rates in 40 years on home mortgages and many other types of loans should be able to take advantage of those low rates at least until summer, private economists said Monday.

They pointed to turbulence on Wall Street over rising worries about a war with Iraq as a primary reason the Federal Reserve will leave interest rates at a 41-year low.

The Fed's top policy-making group, the Federal Open Market Committee, will hold a two-day meeting today and Wednesday to decide what it should do about interest rates. For more than a year, the central bank has kept those rates at the lowest levels since the early 1960s.

In advance of this week's discussions, most economists were expecting no change in the federal funds rate, the interest that banks charge on overnight loans. The Fed pushed that rate down by a half-point to 1.25 percent on Nov. 6.

'Almost a slam dunk'

"It's almost a slam dunk that the Fed will leave rates unchanged," said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh. "I think the evidence is not conclusive that we have gotten past the soft spot."

Federal Reserve Chairman Alan Greenspan and other Fed officials have used the phrase "soft spot," to describe a renewed period of economic weakness that many analysts believe pushed overall growth down to an anemic rate of 1 percent or less in the final three months of 2002.

The Fed's bigger-than-expected half point rate reduction in November was an effort to make sure the slowdown did not deepen into something worse, such as a double-dip recession.

The unemployment rate has risen in recent months, returning to an eight-year high of 6 percent. To get the uncertain recovery from the 2001 recession back on a more sustainable path, the Bush administration promoted a new economic stimulus package.

President Bush's $674 billion, 10-year plan faces opposition from congressional Democrats. Greenspan provided key support in the 2001 passage of Bush's first tax cut, a $1.35 trillion, 10-year package, but it was unclear how much backing the Fed chief will give the new measure.

California Sen. Dianne Feinstein, one of 12 Democrats who supported Bush's earlier tax package, said Monday her opposition to the new plan was reinforced by a closed-door meeting she and other centrist senators held with Greenspan on Thursday.

Heavily influenced by war

Many analysts said the Fed's actions this year will be more heavily influenced by the course of any war with Iraq than what Congress does with Bush's stimulus package.

If the United States invades Iraq and the war is over quickly, the Fed likely will remain on the sidelines until the fall, when it is expected to begin raising interest rates.

That scenario would mean many more months of low rates for borrowers who have already seen mortgage rates and short-term borrowing costs fall to the lowest levels in four decades.

With the expectation that the Fed won't change rates, many analysts believe 30-year mortgage rates could very well stay close to the 40-year low of 5.85 percent set earlier this month, and banks' prime lending rate remaining at 4.25 percent.

Many analysts said that if the Fed does act during the first half of this year, it is more likely to reduce rates than increase them.

"If it turns out to be a messy war with the price of oil spiking higher, then I think we could see the funds rate go to zero," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

But if the war begins and ends soon without a major disruption in oil supplies, many analysts believe the current 1.25 percent funds rate will be the low-point for this easing cycle and the Fed will start boosting rates in late summer or early fall.

However, economists are not looking for rates to move up rapidly when the Fed does begin tightening credit conditions because they think inflation pressures outside of energy will continue to be well-behaved.

"Unless the economy starts doing better than I expect, it will be a slow increase in rates," said David Wyss, chief economist at Standard & Poor's in New York. "There is no inflation out there to fight. They won't slam on the brakes."


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