Fed Unlikely to Move on Interest Rates
Aug 12, 7:49 AM (ET)
By JEANNINE AVERSA
WASHINGTON (AP) - Scattered signs of the economy's revival, especially the hope that a long freeze on business investment is finally beginning to thaw, give Federal Reserve policy-makers ample reasons to stay the course and hold a major short-term interest rate at a 45-year low.
Fed Chairman Alan Greenspan and private economists believe the economy, which limped through the first six months of this year, will gain speed in the final six. Some are estimating that growth in the second half will clock in at an annual rate of 3.5 percent to 4 percent or more.
Near rock-bottom short-term interest rates, with President Bush's third round of tax cuts, should motivate consumers and businesses to spend and invest more, thus strengthening economic growth in the second half, economists said.
Fed policy-makers are "taking solace in the better economic data and believe their forecasts for a second half rebound are on track," said Mark Zandi, chief economist at Economy.com.
There have been promising signs lately. A report from the Institute for Supply Management this month showed that manufacturing activity expanded in July for the first time in five months, further evidence that this part of the economy is on the mend. Manufacturing has had a more difficult recovery from the 2001 recession than any other sector.
Last week, the nation's largest retailers reported strong sales for July, a promising sign for consumer spending, which has been a key force keeping the economy moving.
Especially encouraging to economists, however, were some budding signs in the government's recent report on second-quarter gross domestic product that business investment may be coming back to life.
Businesses, which cut spending on equipment and software in the first three months of this year, boosted such investment in the second quarter at a sizable 7.5 percent rate. That marked the biggest increase in three years. A sustained turnaround in capital investment by businesses is a crucial ingredient to the economy's ability to get back to full throttle, economists said.
Against this backdrop, economists widely expected Greenspan and his Federal Open Market Committee colleagues to hold the main short-term interest rate, called the federal funds rate, at 1 percent, the lowest rate in 45 years, at their meeting Tuesday. An afternoon announcement was expected.
"I do not think that they will move. I think they will be able to breath a sigh of relief that the data show some improvement and some growth," said Clifford Waldman, economist at the Manufacturers Alliance/MAPI, a research group.
Even if the economy rebounds in the second half, the job market is likely to remain sluggish, economists said. The nation's unemployment rate dipped to 6.2 percent in July, mainly because many people left the civilian work force. Businesses cut jobs for the sixth month in a row. Business will want to be certain about the recovery's vigor before going on a hiring spree, economists said.
"I don't see a distinct improvement in the labor market until 2004," said Richard Yamarone, economist with Argus Research Corp. "I think there is plenty of pain if you don't have a job."
The last time the Fed cut the funds rate, the interest banks charge each other on overnight loans, was at its previous meeting on June 25. The Fed sliced the rate by one-quarter percentage point, marking the 13th cut since January 2001, when the central bank's credit-easing campaign began.
In response, commercial banks lowered their prime lending rates for many consumer and business loans, to 4 percent, the lowest level since 1959.
Rates on longer-term loans, however, rose after the Fed's June 25 action. Disappointment on Wall Street that the Federal Reserve didn't make a bolder cut to short-term rates pushed bond rates up, which caused long-term mortgage rates to rise. More recent signs that the economy is gaining traction was another factor behind rising rates.
Rising mortgage rates has slowed refinancing activity, an important force underpinning consumer spending. Economists, however, are hopeful that fatter paychecks and other incentives coming from Bush's latest tax cut will move in to support spending as refinancing cools.
Economists said rising mortgage rates also probably will slow home sales in the second half of this year, but they still are on track to set record highs this year.
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