Federal Reserve Rate-Setting Panel Has Much to Discuss
The Federal Reserve's rate-setting panel is not expected to announce a reduction of short-term interest rates when it ends a second day of meetings today, but the nation's top monetary officials have had much to talk about.
Adding to the specter of war with Iraq and a general strike in Venezuela that cut oil production and caused world crude prices to rise, the Conference Board in New York reported yesterday that US consumer confidence fell this month to its lowest levels in nine years. Orders for durable goods rose in December, though not by enough to lift a moribund manufacturing industry burdened by excess capacity.
Other economic data argue against an interest rate cut by the Fed, economists said, including a housing market that was strong in December and prospects that some portion of the $670 billion tax-cut package by President Bush, if passed by Congress, would spur the economy later this year.
The Fed's open market committee is expected to hold the federal funds rate at 1.25 percent. With rates already low, the Fed wants "to keep some bullets in the gun" for use when they may need them more, said Brian Horrigan, chief economist in Boston for Loomis Sayles & Co.
But few economists predict that officials who set monetary policy in Washington will change the wording of their statement to reflect the rising uncertainty in the economy. The US will release its fourth-quarter estimate of growth tomorrow, and analysts expect it to show the economy slowed dramatically, or even contracted. While most economists forecast a turnaround later this year, they warn of many risks. The Fed "won't do anything unless they have to," Horrigan said. "The next meeting is March. If we're in a situation where bombs are dropping, they might decide to give us one more ease. They also could do it in the interim."
Conflicting signals from the economy caused confusion in the markets.
Yesterday, optimistic investors pushed up stocks in reaction to positive earnings reports by various companies and in anticipation of the president's State of the Union message last night and higher orders for durable goods. The Dow, which has trended downward for more than a week, rose 99.28 points, or 1.2 percent, to 8,088.84. The Nasdaq Composite index gained 16.91 points, or 1.3 percent, to close at 1,342.18.
Speaking yesterday at his confirmation hearing before the Senate Finance Committee, Treasury secretary nominee John Snow, the chief executive of CSX Corp., said about President Bush's sweeping tax-cut proposal, which would cut taxes on stock dividends, "I do know, and I believe this deeply, [that] this is a well-conceived growth package . . .that the country needs."
But economists say a tax package tilted toward wealthy investors may do little to stimulate economic activity at a time when consumer spending may be trailing off and consumer confidence is at its lowest level since November 1993. The Conference Board's monthly index dropped nearly two points, to 79.0 in January, from 80.7 in December. The index does not necessarily portend a decline in actual spending, however, and a closer look revealed mixed sentiment: Consumers said their present situation has improved, but they are pessimistic about the future.
Orders for durable goods rose by 0.2 percent in December, a more sluggish pace than many expected. Excluding defense orders, total orders would have fallen. One surprise was a 3.2 percent surge in December orders for computers and electronics, which matched the pace in July 2002, said Jeoff Hall, economist for Thomson Financial IFR, a financial markets advisory firm in Boston.
In making their decisions about rates, Fed officials must weigh data from the consumer sector against manufacturing activity, Hall said.
While the manufacturing sector has barely responded to low interest rates, another rate cut might encourage consumers to continue the questionable practice of building up debt by tapping into home equity to finance discretionary purchases, such as cars.
"It's not that the Fed doesn't want to see consumer spending continue, but I think they are concerned about how that spending is coming about," he said.
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