Fed plans to keep interest rates low

WASHINGTON -- With jobs still hard to come by, the Federal Reserve is expected to keep promising to leave interest rates at rock bottom for a "considerable period" at its first meeting of 2004. However, there is uncertainty over just what the phrase "considerable period" may mean. Because of the weak jobs picture and dormant inflation, most economists are betting the Fed will put out a statement once again pledging to keep rates low.

"for a considerable period," a phrase which has shown up in the last four Fed statements, going back to last August.

"The Fed is not going to move until they see several months in a row of strong employment numbers, and that has not happened yet," David Wyss, chief economist at Standard & Poor's said Monday.

Wall Street took cheer Monday from comments by Federal Reserve Chairman Alan Greenspan that the economy would be able to recoup the more than 2 million jobs lost since the last recession.

The Dow Jones industrial average rose 134.22 points to close Monday at 10,702.51, its highest finish in 31 months.

In a speech by satellite to an economic conference in London, Greenspan said past history demonstrated that a flexible U.S. economy would be able to recoup the jobs lost in the last downturn, although many laid-off workers will need to be retrained for new skills.

"We can thus be confident that new jobs will replace old ones as they always have, but not without a high degree of pain for those caught in the job-losing segment of America's massive job-turnover process," Greenspan said.

Wyss and other analysts said it is possible that the Fed will keep its target for the federal funds rate, the interest that banks charge each other, at a 45-year low of 1 percent for all of 2004.

That would be good news for borrowers and such consumer-sensitive industries as housing and autos, which have seen sales skyrocket because of the lowest financing charges in more than four decades.

The advisory committee of the American Bankers Association, 10 top bank economists who give Fed officials their assessment of the economy twice a year, expects Fed rate increases will not occur until the last half of the year. And even when the Fed starts moving rates, the panel said, the increases will be moderate.

The group's median forecast is for the federal funds rate to be at 1.6 percent at the end of this year.

Sung Won Sohn, chief economist at Wells Fargo in Minneapolis and a member of the ABA panel, is even more optimistic, believing the Fed will leave rates alone for the entire year.

"In an election year, why raise interest rates unless you have a strong economic justification?" Sohn said.

Sohn said the Fed's signals to the markets this year will probably come in three stages: the removal of the "considerable period" promise; a change in the balance of risks from neutral to risks weighted toward higher inflation; and a rate increase. Sohn said the Fed probably won't make its first rate hike until next January.

The Fed's chief policy-making group, the Federal Open Market Committee, is expected to discuss possible changes in the format of the statement it issues at the end of each meeting during its two days of discussions Tuesday and Wednesday.

"They are thinking about how to communicate more effectively in order to avoid whipsawing the bond market, which they did last year," said David Jones, head of DMJ Advisors, an economic consulting firm.

Alan Greenspan, now in his 17th year as Fed chairman, saw his reputation as a sure-footed communicator tarnished a bit after bobbled signals to the bond market last spring made some investors believe the central bank was going to adopt an even more aggressive stance to fight deflation, a destabilizing period of falling prices, than it ended up taking.

Some Fed officials believe the "balance of risks" assessment, designed to signal possible interest rate moves, should be scrapped altogether, while others want it made clearer. The central bank may decide to leave things unchanged while it studies the communications issue further.