Fed leaves interest rates unchanged

www.bday.co.za

By David Williams

WASHINGTON — Federal Reserve policymakers left interest rates at a four-decade low Wednesday, banking the economy would awaken from its torpor when war clouds lift and high oil prices retreat.

Federal Reserve chairman Alan Greenspan and his colleagues voted unanimously to leave the federal funds target rate, which commercial banks charge each other for overnight loans, at 1.25%.

"Oil price premiums and other aspects of geopolitical risks have reportedly fostered continued restraint on spending and hiring by businesses," the Federal Open Market Committee said in a statement.

"However, the committee believes that as those risks lift, as most analysts expect, the accommodative stance of monetary policy, coupled with ongoing growth in productivity, will provide support to an improving economic climate over time."

Policymakers agreed, as expected, to keep the economic growth and inflation outlook neutral, meaning they had no particular leaning towards cutting or raising rates in the foreseeable future.

The Federal Reserve had been expected to tread carefully so as not to feed nerves on financial markets just a day after President George W. Bush braced the country for possible war against Iraq.

The two-day committee meeting wrapped up a day before the release of of new economic growth figures, which are widely expected to show growth at an annual rate of 1% or less in the fourth quarter.

But "what we can take away from the comments is that the FOMC members believe that their stance is accommodative enough," said Joel Naroff, president of Naroff Economic Advisors.

"It is only temporary factors that are holding back growth. If that is true, it will take another shock to get the members to cut rates again. That could occur, but the onset of a war with Iraq would not be enough. The war would have to go wrong in some way."

The Federal Reserve's willingness to hold the line on interest rates indicated that policymakers believed they already were in an "extremely aggressive" policy stance, Naroff said.

"And if they do feel that way, you can be sure they will feel the need to unwind that aggressive stance rapidly when growth does return."

Swiss Re chief US economist Kurt Karl agreed.

"During the second half of the year, the Fed will begin to raise rates," he forecast.

"The housing market remains robust, business investment is improving, and consumers are spending. Furthermore, the government is contemplating a hefty tax cut/stimulus package that will boost growth in the short term and increase the need for higher interest rates. By mid-year, oil prices are projected to fall, as the troubles in Venezuela and geopolitical risks recede."

Bush promised in his State of the Union speech to boost economic growth and create jobs with his 674-billion-dollar stimulus package. US firms axed 101,000 jobs in December, when the unemployment rate was stuck at 6.0%.

The US leader also called for accelerating tax-rate cuts approved in 2001 as part of his first 10-year, 1.35-trillion-dollar tax cut, moving them up to this year from their scheduled implementation of 2004 and 2006.

The Wall Street Journal reported Monday that Greenspan had privately told senators he doubted Bush's tax cuts would stimulate the US economy in the short term.

Senators attending the meeting concluded Greenspan would prefer to see them pass a much smaller tax cut or none at all, the Journal reported.

Drew Matus, US financial markets economist at Lehman Brothers, said he believed the economy would prove weak enough over the coming six weeks to warrant a rate cut.

"The Fed essentially decide to take a vacation until the Iraq situation resolves itself over the coming weeks," he said.