The Telegraph
Since 1st March, 1999
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Fed fists look closed

Washington, Sept. 24 (Reuters): Faced with an economy finely balanced between exuberant consumers and cautious corporations, Federal Reserve policy-makers were expected to keep US interest rates on hold on Tuesday.

The US central bank’s Federal Open Market Committee was scheduled to begin meeting at 9 a.m. to consider interest-rate strategy and to announce a decision around 2:15 p.m.

There was scant suspense about the outcome on Wall Street, where analysts said the fragile recovery from last year’s recession meant there was good reason to keep rates at current stimulative 40-year lows — but that there was not enough hard evidence to warrant adding to last year’s 11 rate reductions.

“We’re in a kind of economic limbo here,” said Bob Gay, an economist with Commerzbank Securities in New York. He noted that corporations were strongly focused on reducing hefty debt loads but consumers kept spending and incomes were rising.

US equities are suffering the worst bear market in 60 years as earnings worries and concern about a possible war with Iraq weigh heavy and stock market declines could ultimately take a bite out of consumer spending. Still, consumers have seemed undaunted thus far.

Recent data have painted a mixed — occasionally perplexing — picture of the economy. New-car sales have zoomed ahead at a near-record pace, fuelled by cheap financing, but the New York-based Conference Board said on Monday its index of leading indicators fell for a third straight month in August in a portent of lacklustre growth down the road.

Robust spending guarantees a healthy rate of advance in gross domestic product during the third quarter, since consumers account for two-thirds of national economic activity, but other sectors have not displayed matching strength.

Growth scenario

Analysts say the most likely scenario is for the economy to keep growing but at rates that will lead Fed policy-makers to keep intact their caution that further weakness, not greater inflation, is the greatest risk.

“The US recovery, while certainly sub-par and certainly fraught with downside risks, still appears sustainable,” economist Chris Probyn of State Street Corp. in Boston said after the leading indicators index was published.

He said high levels of initial jobless claims were a major factor dragging down the index and added that implied the country faced a “jobless recovery” like the one after the 1990-91 recession that felt like a continuing downturn long after growth had resumed. That is a suggestion a number of other economists, and Dallas Fed president Robert McTeer, have echoed recently.

A poll last week of Wall Street’s biggest firms — the 22 primary dealers that trade directly with the Fed — was unanimous in predicting no change in the existing 1.75 per cent federal funds rate on Tuesday.

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