Divided Fed holds line on bank rate
By Jeannine Aversa
Associated Press
WASHINGTON — Over the dissent of two of its members, the Federal Reserve yesterday held interest rates steady despite a wobbly economic recovery and worries about a possible war with Iraq. The dissenting pair favored a rate cut — the first of the year.
The Fed's decision to hold the funds rate steady means that commercial banks' prime lending rate — the benchmark for many loans — will remain at 4.75 percent, the lowest level since November 1965. • On the Web: Federal Reserve: www.federalreserve.gov • • • Economy at a glance After being knocked down by last year's recession, the economy is back on its feet but isn't bursting with vitality: Businesses have remained reluctant to make big commitments in hiring and capital spending. Manufacturing, hardest hit by the recession, lost considerable momentum in August. Layoffs have been rising recently, and economists are predicting that the nation's jobless rate — now at 5.7 percent — will probably increase slightly in the months ahead, reversing recent decreases. Consumers, whose spending accounts for two-thirds of all economic activity in the United States, have been the primary engine keeping the economy going, but the Conference Board reported yesterday that consumer confidence fell in September for the fourth consecutive month, dropping to the lowest level since November of last year, as rising layoffs and talk of war with Iraq took their toll.
Economists said that the 10-2 vote among the members of the Federal Open Market Committee — responsible for setting interest-rate policy — shows the difficulty even among experts to divine where the economy is heading in these turbulent times.
Prime rate
"I think this highlights the level of uncertainty and the confusion regarding the economy's outlook and how policy-makers should respond," said Mark Zandi, chief economist at Economy.com. "I don't think you can conclude that (Fed chairman Alan) Greenspan is losing control."
With Greenspan and his colleagues citing "geopolitical risks" — something most economists view as a reference to Iraq — as a potential danger to the fragile economy, many analysts said that odds are growing that the central bank will cut rates later this year, possibly at its next meeting on Nov. 6.
Yesterday, two of the 12 Fed members — Edward Gramlich and Robert McTeer — wanted an immediate rate cut and voted against the central bank's decision to leave rates unchanged. That revealed a crack in the unified front often presented to the public.
At the closed door meeting, Greenspan and the majority of his FOMC colleagues voted to keep the federal funds rate, the interest that banks charge each other on overnight loans, at a 41-year low of 1.75 percent. It marked the sixth consecutive Fed meeting this year at which policy-makers decided to leave rates alone.
The funds rate dropped to 1.75 percent in December, which marked the last time the Fed lowered short-term rates and the last time a dissenting vote was cast on the FOMC.
Some economists viewed yesterday's dual dissents as an indication of the vigorous debate taking place over the direction of the economy and predicted that more dissents will be seen in the future. Most economists viewed that as a healthy development, rather than a sign that Greenspan is losing influence over his Fed colleagues.
"I think there is a sense now that it is OK to disagree in public with the chairman and this is probably a reflection of a Greenspan-engineered increase in more openness, more transparency," said Sung Won Sohn, chief economist at Wells Fargo. "If that is not the case, then the iron grip Greenspan has had on the committee may be loosening."
While the Fed held short-term interest rates steady, it continued to leave the door open to future rate reductions.
By keeping rates low or possibly nudging them down later, Fed policy-makers hope to motivate consumers to spend more and businesses to ramp up investment, something that would strengthen the fragile recovery.
The Fed said that economic information since its last meeting on Aug. 13 suggests that consumer and business demand is "growing at a moderate pace."
Over time, the Fed said, its currently low interest rates and gains in productivity should be "sufficient to foster an improving business climate."
However, the Fed said that "considerable uncertainty persists about the extent and timing of the expected pickup in production and employment, owing in part to the emergence of heightened geopolitical risks."
While many analysts consider a "double dip" recession scenario remote, it can't be ruled out, they said.
A dramatic and prolonged rise in energy prices stoked by Middle East tensions and a big cutback in spending by consumers — the driving force behind the economy — would probably send the economy into a nosedive, analysts say.
