Originally created 03/16/04

Fed likely to remain patient in keeping key interest rate at 45-year low



WASHINGTON -- Federal Reserve policy-makers, who have promised to be patient in raising interest rates, will honor that commitment at their meeting this week, economists predicted on Monday.

Analysts pointed to continued weak hiring as a primary reason that Federal Reserve Chairman Alan Greenspan and his colleagues will leave the target for the federal funds rate, the rate that banks charge each other, at a 45-year low of 1 percent.

"With job growth still weak, there is absolutely no reason for the Fed to change policy," said David Jones, president of DMJ Advisors, an economic consulting firm in Florida.

The Fed jolted markets at its last meeting on Jan. 28 when it left rates unchanged but dropped a promise it had been making since August to keep rates low "for a considerable period." The Fed replaced that phrase with a promise that "it can be patient" in deciding when to raise interest rates.

The subtle change was enough to send stock and bond prices plunging on worries that the extended period of low rates could be ending.

But since then, the government has released disappointing unemployment reports for January and February showing job increases lagging far behind expectations. In February, the economy created just 21,000 new jobs, far below the 125,000 economists had been expecting.

"I think we took a step backward in the sense that the economy has lost some momentum since the last Fed meeting," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis, noting the poor job performance and declines in consumer confidence.

However, not all the news has been bad. The government reported Monday that industrial production rose a strong 0.7 percent in February, nearly double what analysts had expected, following a strong 0.8 percent gain in January.

That raised hopes that the nation's beleaguered manufacturing sector, which has seen the loss of 3 million jobs since mid-2000, may finally be turning around.

But analysts said the central bank will still need to see a sustained period of rising employment before it begins to worry that it should start raising interest rates to make sure that tight labor markets don't begin putting pressure on inflation.

Strong employment growth is also being awaited at the White House where President Bush has painful memories of what a weak economy did to his father's re-election chances in 1992.

David Wyss, chief economist at Standard & Poor's in New York, said that Bush should still be able to win on the economy issue if job growth rebounds to a stronger level in the next few months.

"We think job growth will pick up to 140,000 or so a month, which is about what we have averaged over the last 10 years," said Wyss. "If people feel (the job market) is turning, then I think Bush is still okay" even if he fails this year to make up all of the 2.2 million jobs lost since he took office.

Because the country is in an election year where the job machine has yet to get revved up, analysts believe the Fed is in no hurry to consider raising interest rates, especially given that inflation pressures outside of such areas as energy remain a no-show.

Some economists have pushed their prediction of when the first rate hike will occur into 2005, but other analysts believe that the Fed could move after the election at either the Nov. 10 or Dec. 14 meetings.

That outlook would mean that short-term rates such as the federal funds rate and banks' prime lending rate, currently at a 45-year low of 4 percent, should stay at those levels for most of this year.

And analysts believe that long-term rates, set by market forces, will remain at low levels for a considerable time as well, given the absence of inflationary pressures and heightened market unease in the wake of the terrorist bombings in Madrid, Spain.

The 30-year home mortgage dipped last week to 5.41 percent, according to Freddie Mac's nationwide survey, down from 5.59 percent the previous week and near the four-decade low of 5.21 percent set last June.