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Fed expected to hold interest rates steady

Tuesday, December 10, 2002

WASHINGTON -- Amid a stagnant job market, stock market turbulence and a shake-up of President Bush's economic team, the Federal Reserve is expected to hold short-term interest rates at 41-year lows today at its last meeting of the year.

That's the feeling among economists who believe that although the country will not fall into a new recession, the economy probably will struggle with tepid growth this quarter and in the first quarter of 2003.

Knocked down by last year's recession, the economy has experienced an uneven recovery this year. The seesawing growth -- a below-par 1.3 percent pace in the second quarter, rising to a brisk 4 percent rate in the third quarter -- troubles the Bush administration, Fed policy-makers and Wall Street.

"The economy is like a car trying to navigate a winter highway. It is moving but at a very sluggish pace and there have been stretches where conditions are quite slow and treacherous," said Lynn Reaser, chief economist at Banc of America Capital Management. "The general view, however, is that road conditions are going to improve in the spring, but until then a weather alert will remain in effect."

The manufacturing sector's comeback trail has hit a pothole. But consumers -- the lifeblood of the economy -- have been keeping their pocketbooks and wallets sufficiently open to prevent the recovery from fizzling. And low-mortgage rates are expected to power home sales to new records this year.

New claims for jobless benefits recently hit a 21-month low, suggesting layoffs are slowing. Yet the nation's unemployment rate jumped to 6 percent in November matching April's figure, which was the highest rate in eight years.

The high unemployment is fresh evidence that companies, worried about a possible war with Iraq, the stock market and battered profits, are reluctant to make big commitments in hiring and capital investment, thus restraining the recovery.

Against this backdrop, many economists believe Fed chairman Alan Greenspan will hold a key interest rate -- the federal funds rate -- steady at 1.25 percent when they meet Tuesday. The funds rate is the interest that banks charge each other on overnight loans and is the Fed's main lever for influencing the economy.

"I think the Fed will stand pat, allowing time for its previous rate cuts to sink in," said Stuart Hoffman, chief economist at PNC Financial Services Group.

By holding interest rates steady, Fed policy-makers hope to motivate consumers to spend more and for businesses to ramp-up investment, forces that would help the recovery.

The Fed's first rate cut this year and the 12th since January 2001 came at the central bank's previous meeting, Nov. 6. That bold, half-point reduction pushed the funds rate down to 1.25 percent. In response, some commercial banks' lending prime rate dropped to 4.25 percent.

Were the economy to show new signs of stumbling, economists said they wouldn't rule out an interest rate reduction at the Fed's first scheduled meeting of 2003, on Jan. 28 and 29. Economists also believe Congress is likely to pass an economic stimulus package next year, taking some pressure off the Fed to reduce rates.

If the economy picks up momentum next spring, as some analysts predict, and that continues to build, economists said the Fed might raise rates late next year.

Economists predict a winter lull. Many think the economy is growing at only a 1.4 percent rate this quarter and they foresee a lackluster 2.5 percent growth rate in the first quarter of 2003.

Given that, economists think unemployment could remain at 6 percent in coming months, a potential problem for Bush's 2004 re-election campaign.

On Monday, Bush tapped John W. Snow, chairman of the transportation and railroad conglomerate CSX Corp., to replace Treasury Secretary Paul O'Neill. On Friday, O'Neill and White House economic adviser Larry Lindsey were fired in a shake-up designed to control political damage from the sputtering economy.

"I pledge to you to use all my talents, my power, my energy and my ability to strengthen the current economic recovery and create an environment where millions of job creators ... will grow and prosper," Snow said.

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On the Net:

Federal Reserve: http://www.federalreserve.gov


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