Fed expected to leave interest rates unchanged

WASHINGTON -- The slumping stock market, lackluster job growth and increasing worries about possible war with Iraq are battering the economy. Yet Federal Reserve policy-makers are not expected to come through with further interest rate cuts when they meet Tuesday.

Economists believe Federal Reserve Chairman Alan Greenspan and his colleagues will decide that by leaving rates at a 40-year low, they are doing enough to prod a sustainable economic recovery.

That outcome would disappoint Wall Street. Many investors believe the Fed needs to make additional cuts to bolster consumer and business confidence, which has been shaken by the recession, terror and corporate scandals.

"The Federal Reserve is not going to cut rates simply to boost the stock market," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. "The economic numbers are not as robust as the Fed would like to see, but Fed officials believe moderate economic growth is occurring."

The Fed, at its last meeting on Aug. 13, decided to leave its target for overnight bank borrowing at 1.75 percent, where it has been since December. The Fed held out the possibility of further rate cuts by indicating it viewed economic weakness rather than inflation as the bigger threat in the months ahead.

Even though many analysts said they expect rates to remain steady Tuesday, there remains a chance of a rate cut at one of the bank's final two meetings, in November or December. That could become more possible if there are more economic shocks -- for example, a big drop in consumer confidence from a U.S. invasion of Iraq, or new terrorism attacks or a disruption in oil supplies because of Middle East tensions.

"The Fed is preserving some ammunition in case they need it," said David Wyss, chief economist at Standard & Poor's in New York. "There are a lot of things that could go wrong out there."

Economic growth slid in the spring to a weak 1.1 percent annual rate. In recent weeks, analysts have raised their forecasts for the current July-September quarter based on surprisingly strong retail sales in August and a big improvement in the international trade deficit.

Bruce Steinberg, chief economist at Merrill Lynch, said strong growth would help bolster corporate profits, a major missing ingredient in the recovery.

"The U.S. economy is in a transition period where companies are restructuring themselves for renewed profitability. That process is creating confusing crosscurrents," he said.

One example is the recent sharp rise in layoff notices, which have climbed above 400,000 per week. Analysts associate a level that high with a deteriorating labor market.

Many economists believe the jobless rate, which dipped unexpectedly to 5.7 percent in August, will rise slightly in coming months to reflect the new wave of layoffs. An increase above 6 percent almost certainly would mean more rate cuts, analysts said.

In one way, the uncertainty on Wall Street is having a beneficial impact, pushing many investors to the safety of government bonds.

This stampede into the bond market has sent long-term rates, which are set by markets, to levels not seen in more than a generation.

The nationwide average for 30-year mortgages dipped to 6.05 percent last week, the lowest level in 31 years of Freddie Mac record keeping.

These low mortgage rates have prompted record levels of refinancing of mortgages, with consumers using monthly savings to boost spending in other areas.