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Fed Meets, Rates Expected to Stay Steady
By Glenn Somerville
WASHINGTON (Reuters) - Federal Reserve (news - web sites)
policy-makers began meeting on Tuesday amid universal expectations
that they will keep interest rates at 46-year lows in the absence
of a convincing brightening in job prospects.
The U.S. central bank's rate-setting Federal Open Market Committee
(news - web sites) began meeting at 9 a.m. EST and was to announce
a decision at about 2:15 p.m. EST.
The Fed's bellwether federal funds rate for overnight loans between
banks -- which influences borrowing costs throughout the economy
-- stands at the 1 percent level hit last June after the 13th in
a string of cuts since 2001.
The Fed has since kept rates unchanged despite widespread signs
of quickening economic activity.
Shortly before the Fed meeting, the Commerce Department (news -
web sites) reported a slower pace of new U.S. homebuilding in February
-- possibly weather-related but notable because it occurred in a
sector that has benefited most from low interest rates.
Starts on new homes fell 4 percent to a seasonally adjusted annual
rate of 1.855 million units, weaker than forecast.
But the job market remains the missing link that will keep rates
from being increased soon, analysts said. The stagnant job market
worries central bank policy makers as well as President Bush (news
- web sites), who in November faces presidential elections where
the economy is a key issue.
NEED JOBS
"I think the Fed can't possibly raise rates until it sees a
definite upturn in employment," said economist Rich Yamarone
of Argus Research Corp. in New York. "I've always believed
that it could be mid-2005 before we have a rate increase and I'm
now thinking that it may be beyond even that."
A surprisingly low new-job tally of 21,000 in February rocked financial
markets' confidence in the economy's ability to generate robust
employment, while events such as last week's train bombings in Spain
have sent tremors through global investors' confidence.
Other economic signs have been more positive -- even robust -- such
as the Fed's report on Monday that U.S. industrial output jumped
by 0.7 percent in February.
The same report showed mines, factories and utilities ran at 76.6
percent of capacity, the strongest operating rate since August 2001.
But it fell far short of the 80 percent levels economists see as
implying supply shortages, and it comes in an environment of low
overall inflation, meaning there is little pressure to cool the
economy with higher interest rates.
Some analysts said that while rates will remain steady on Tuesday,
Fed policy-makers may use their end-of-meeting statement to make
clear they are not tied to a timetable for keeping rates low --
something Fed Chairman Alan Greenspan (news - web sites) emphasized
earlier this month.
NEVER SAY NEVER
"The federal funds rate is accommodative and at some point
it will have to rise back to a more neutral state, because it is
inconsistent with general long-term stability," the Fed chief
told the Economic Club of New York.
Gary Thayer, an economist with A.G. Edwards and Sons in St. Louis,
Mo., said he will monitor closely whether the Fed retains its assessment
that it can afford to "be patient" about raising rates.
A change in the wording could give policy-makers more flexibility
for future rate action, by eschewing any implication of a time limitation,
he added.
"The economy is beginning to produce at an above-average rate
and, early in the recovery cycle, companies do try to rebuild profits
before they start hiring," Thayer said. "We're seeing
that happen now and I agree with Greenspan that if that continues
we'll see more job growth before too long."
The Fed in January dropped a pledge adopted in August to keep rates
low for a "considerable period," and opted instead for
a less specific promise of patience.
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