Fed not likely to raise rates Tuesday
By Nell Henderson
Washington Post
WASHINGTON — Federal Reserve policy-makers are almost certain to keep interest rates near rock-bottom lows when they meet Tuesday, and for many months to come, because of the continuing unevenness of the U.S. economic expansion, many investors and analysts have concluded.
The economy has sent a series of mixed messages since Fed officials last met in late January, with several businesses enjoying rising sales and profits, but without hiring significant numbers of new workers.
Fed Chairman Alan Greenspan told Congress Thursday, "As our economy exhibits increasing signals of recovery, job loss continues to diminish. But new job creation is lagging badly."
And while he predicted that, "In all likelihood, employment will begin to increase more quickly before long as output continues to expand," he went on to endorse extending unemployment benefits for those who have exhausted them after six months.
Among the encouraging signs of economic growth was the Commerce Department's report yesterday that business sales rose 0.4 percent in January.
But the department also reported that the nation's overall trade deficit swelled to a record $541.8 billion last year, as much of the growing U.S. appetite for goods and services was being satisfied by imports, rather than by domestic production.
Some analysts have worried that rising prices for energy, steel, lumber and many other raw materials may be creating inflationary pressures that will prompt the Fed to raise rates sooner than financial markets expect. But Greenspan and other Fed officials have said repeatedly that they don't see any signs that inflation is about to take off.
"The Fed can't possibly think of raising interest rates any time soon," said Richard Yamarone, director of economic research for Argus Research Corp., who forecasts lackluster job growth to continue for six to nine months, and predicts the Fed will wait to raise rates until mid-2005.
"Furthermore, inflation isn't flashing yellow on the Fed's radar screen. There is no evidence that higher raw material and industrial commodity prices are leaching into the retail or consumer sector," he wrote in a recent note to clients.
Investors who trade in futures contracts tied to Fed actions have priced them to reflect the expectation that policy-makers will leave their target for overnight rates unchanged at 1 percent until the end of this year, and some economists predict no increase in the target until some time in 2005.
Fed policy-makers have kept their target at 1 percent — a 45-year low — since June, helping to spur economic growth by holding down borrowing costs for households and businesses. After leaving the target unchanged at their January meeting, policy-makers explained in a statement that they could "be patient" in deciding when to raise rates because of low inflation and "slack" resources, meaning unused production capacity and plenty of available labor.
The statement did note that some "indicators suggest an improvement in the labor market," but the slack has only grown since then — raising the possibility that Fed officials might alter their language on employment in the statement they issue after their Tuesday meeting.
U.S. job creation essentially stalled over the past three months, with payrolls rising each month by amounts so small that labor economists call them "statistically insignificant."
Meanwhile, consumers have grown gloomier about the job market this month, the University of Michigan reported yesterday, echoing several polls showing that voters rank the employment picture among their top concerns.
Fed officials see no inflationary pressure from such a weak job market. Average hourly earnings rose just 1.6 percent in the 12 months that ended in February, the lowest 12-month increase since December 1986.
On the contrary, some economists worry that continued weakness in the job market could cause the expansion to falter, perhaps causing the Fed to cut rates again.
"If payrolls remain weak in the next three to four months, rate cuts are not totally out of the question either," said Ian Morris, chief U.S. economist for HSBC Bank PLC. "If payrolls are still weak when the consumer tax refunds are behind us ... then the economy could be in real trouble."
