TECHNICAL ANALYSIS

[Stock Analyzer]

Fed Expected to Keep Rates Unchanged
Wednesday March 21, 7:37 am ET
By Martin Crutsinger, AP Economics Writer
Federal Reserve Officials Expect to Keep Interest Rates Unchanged


WASHINGTON (AP) -- As the Federal Reserve tries to guide the economy in for a soft landing, it is being battered by turbulent financial markets, a slumping housing industry and stubborn inflation pressures.
ADVERTISEMENT


None of that is expected to alter the course Fed Chairman Ben Bernanke and his colleagues have established of keeping interest rates steady at current levels until there is firm evidence that inflation pressures have begun to recede.

Wrapping up a two-day meeting on Wednesday, Fed officials were widely expected to hold interest rates unchanged while still expressing greater concerns about inflation than the threat of weaker economic growth.

The federal funds rate, the interest that banks charge each other, has been at 5.25 percent since last June when the central bank capped a two-year, credit-tightening campaign with its 17th consecutive quarter-point rate hike.

In the five Fed meetings since that time, the central bank has stayed on hold. Economists believe this will be the sixth meeting with no move on interest rates even though the economic landscape has changed significantly since the last Fed meeting on Jan. 30-31.

The stock market, which had been hitting record highs, has suffered some stomach-churning days, including a 416-point plunge in the Dow Jones industrial average on Feb. 27.

That market swoon was blamed on comments former Fed Chairman Alan Greenspan made about the possibility of a recession at the end of this year and spreading troubles among lenders dealing in subprime mortgages, loans made to borrowers with weak credit histories.

In addition, the economy has turned weaker with business investment, which had been expected to take up the slack from a weakening home market, faltering. And consumer spending is weaker as well.

That is why some economists have been pushing the possibility of a recession higher this year. Greenspan put the odds at one in three.

Normally, the central bank would respond to spreading economic weakness by cutting interest rates. However, two reports on inflation last week showed that price pressures remain a problem with both wholesale and retail prices rising more rapidly in February.

Excluding food and energy, consumer prices have been rising this year at an annual rate of 3 percent, far above the Fed's 1 percent to 2 percent comfort zone.

Because of the inflation pressures, analysts said the Fed is unlikely to cut rates any time soon in response to the weaker economic data.

"People who were getting optimistic about rate cuts were being ridiculous," said David Jones, chief economist at DMJ Advisors. "The Fed will start cutting rates only when they see the housing decline begin to drag overall economic growth below their Fed forecast."

Jones said he still expected there will be one or two rate cuts this year but not before late summer at the earliest.

While the Fed is not expected to change interest rates at this meeting, the central bank could modify its statement describing current economic conditions to take notice of the weaker data since January.

"It is pretty clear that there have been some downside risks since the January meeting, particularly in the subprime market and in the weakness in capital spending," said Lyle Gramley, a former Fed board member and now an economic adviser at Schwab Washington Research Group.

Gramley said he still believed the economy will avoid a recession this year and will turn in faster growth in the second half of the year. He said if that occurs, the central bank will not feel the need to change rates at all and will leave the funds rate at 5.25 percent for the entire year.

That would mean that consumer interest rates tied to Fed policies will remain on hold as well. Banks' prime interest rate, the benchmark for millions of consumer and business loans, is currently at 8.25 percent, where it has been since the Fed's last rate hike in June 2006. That is the highest level for the prime since March 2001.

Many analysts said the basic guessing game this year will be over what changes the Fed will make it its statement to fulfill Bernanke's commitment for the central bank to do a better job of communicating to financial markets.

"They will have to change the wording," said T.J. Marta, fixed income strategist for RBC Capital Markets in New York. "In January, they said growth was firmer and we haven't had a decent growth indicator since that meeting."

Federal Reserve: http://www.federalreserve.gov