Fed Expected to Keep Interest Rates Low
By JEANNINE AVERSA, Associated Press Writer
WASHINGTON - The last, crucial piece of the economic recovery puzzle — a turnaround in the sluggish job market — is still missing, reason enough for the Federal Reserve (news - web sites) to keep short-term interest rates near rock-bottom levels through much or all of this year.
A report this month showing slow job growth in February raised the odds that Fed policy-makers will wait even longer than economists previously thought to begin to nudge up short-term rates.
"Payroll growth has been sluggish. That's the nail in the coffin for no rate hike move," said Richard Yamarone, economist with Argus Research Corp. He believes the Fed will hold rates at currently low levels through this year and into 2005.
The economy added a paltry 21,000 jobs last month — all of them in government. Private payrolls were flat.
There were some 8.2 million people unemployed in February, with the average duration of 20.3 weeks without work. That marked the highest average duration of joblessness in over 20 years.
Job growth has been stubbornly slow despite recent improvements in economic activity.
The economy, after struggling to get back on its feet after the 2001 recession and terrorist attacks, finally snapped out of a funk in the second half of last year, growing at its strongest pace since early 1984. The economy is expected to grow at a healthy rate of more than 4.5 percent in the first half of this year, economists predict.
Since President Bush (news - web sites) took office in January 2001, the economy has lost 2.2 million jobs.
The loss of jobs — including those that have moved overseas — is a major issue in the presidential campaign.
Presumptive Democratic presidential nominee John Kerry (news - web sites) points to the lackluster job climate as evidence that Bush's economic policies aren't working. Bush, meanwhile, has called on Congress to make his tax cuts permanent to spur job growth.
Although companies are generally feeling better about the economy, they are still cautious about hiring. Productivity gains also have allowed companies to produce more with fewer people, economists said.
With inflation under wraps even as the economy has registered solid growth, Fed policy-makers have leeway to hold interest rates steady, economists said.
Against that backdrop, economists widely expect Fed Chairman Alan Greenspan (news - web sites) and his Federal Open Market Committee (news - web sites) colleagues to keep the federal funds rate at a 45-year low of 1 percent at the end of their meeting Tuesday. The meeting got under way in the morning and an afternoon announcement was expected.
The funds rate — the interest that bank charge each other on overnight loans — is the Fed's primary tool to influence economic activity. The funds rate has been at 1 percent since June.
By holding the funds rate steady, consumers and businesses might have an incentive to spend and invest more, boosting economic growth.
If the funds rate is left alone, that means commercial banks' prime lending rate would stay at 4 percent, the lowest level in more than four decades. The prime rate is the benchmark for many short-term consumer and business loans.
At the Fed's previous meeting on Jan. 27-28, policy-makers got rid of a pledge that they would hold rates at super-low levels for a "considerable period." Instead, they said they would be "patient" in ordering any possible rate increases.
At that time, the change reinforced some economists' beliefs that the Fed could begin to boost rates as early as its June meeting. But after the dismal February employment report, some economists said a June rate increase was out of the question. Others said the prospects of any increase this year was unlikely.
"I am convinced that any sort of tightening is off the table for this year," said Clifford Waldman, economist at Manufacturers Alliance/MAPI, a research group.
If the jobs market doesn't turn around soon, some economists worry that consumers could turn cautious, raising the risk of an economic slowdown in the second half of this year.
Yet, others — hopeful that job growth will pick up — continue to believe that the Fed may raise rates later this year, perhaps after the elections, at the central bank's Nov. 10 or Dec. 14 meetings.
Greenspan said this month that extra-low rates eventually will have to go up, but he didn't give a clue when. "The federal funds rate is accommodative ... but at some point, it will have to rise to a more neutral state," he said.
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