US Federal Reserve Leaves Rates Unchanged

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Last updated at: (Beijing Time) Wednesday, May 08, 2002

US Federal Reserve Leaves Rates Unchanged

The Federal Reserve kept interest rates unchanged Tuesday, leaving them at four-decade lows after a stream of soft economic data cast doubt on the strength of the economic recovery.

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The Federal Reserve kept interest rates unchanged Tuesday, leaving them at four-decade lows after a stream of soft economic data cast doubt on the strength of the economic recovery.

The central bank of the United States is waiting for definite signs that the economic recovery is secure before it starts boosting the 1.75% federal funds rate, which influences borrowing costs throughout the economy, analysts say.

The decision means the prime lending rate - a benchmark for many consumer and business loans - will remain at 4.75%, the lowest level since November 1965. Borrowers will have more time to take advantage of low-cost financing, but savers will have to continue to deal with measly returns.

In its statement, Fed policymakers said economic growth has been receiving a ''considerable upward impetus'' from slower inventory liquidation by businesses. However, the degree of the strengthening in demand by businesses and consumers in the coming quarters ''is still uncertain,'' and risks remain balanced between inflation and recession.

This marks the third consecutive Fed meeting this year that policymakers decided to hold rates steady. The Fed can afford to leave rates alone for a while: Inflation remains tame, unemployment is at a 7-1/2-year high, and there are scant signs of a much-awaited recovery in business investment.

In addition, analysts reckon a mild recovery is under way, and the data do not signal a decline back into negative territory.

"They have the luxury of time," says Richard Berner, chief US economist at Morgan Stanley in New York.

The central bank staged one of its most aggressive easing campaigns in history last year, cutting interest rates 11 times, for a total of 4.75 percentage points, to help prop up the ailing US economy, which was hammered after the Sept. 11 attacks.

But the economy, fueled with the cash freed by low interest rates, is headed for recovery, adding to expectations of rate increases in the months ahead.

That means borrowers will have more time to take advantage of low-cost financing, but savers will have to continue to deal with measly returns.

The question is how many months. The Fed will likely stay on the sidelines well into the summer, as moderate economic growth and low inflation buy policymakers time before they feel a need to raise interest rates, according to a survey of 51 economists by USA TODAY.

Economists point to softer economic data in recent weeks, including the April employment report that showed a jump in the jobless rate to 6% - a level unseen since 1994 - as evidence the Fed will wait.

Half the economists surveyed say they do not expect the Fed to raise its target for short-term interest rates until August. That means the Fed also could leave rates alone at its next meeting, June 25 and 26. A quarter of the economists said they expect rates will stay at their current 40-year low until fall, or later.

"The Fed will not raise rates until they are convinced the recovery is sustainable," says Putnam Investments economist Robert Goodman. "They don't want to get blamed for aborting a recovery."

Gross domestic product, broadest gauge of the USA's economic health, will expand at an annual rate of 3.1% this quarter and total 3.7% for 2002, according to the economists surveyed April 26-30. While GDP grew at a 5.8% annual rate in the first quarter, analysts expect the growth rate to slow the rest of the year.

Inflation is expected to be 1.8% in 2002, up from 1.6% in 2001.

But the economists say there are risks:

** Continued war in the Middle East or a US invasion of Iraq. Both could lead to crude oil and gasoline price surges, acting as a tax on consumers. Consumer spending accounts for two-thirds of US economic activity.

** Stock prices continue to slide. "People who can remember the 20% and 30% increases in their stock portfolios are going to look at the returns this year as being substandard," US Chamber of Commerce chief economist Martin Regalia says. Soft stock prices dampen consumers' spirits and business spending.

** Continued gloomy mood among CEOs. That could delay hiring and business investment, which fell last year. One-third of the economists surveyed said they expect investment to return in the current quarter, while more than half said it would not come back until the second half of the year.

** Another terrorist attack. After the initial shock, the US economy did surprisingly well after Sept. 11, but analysts say another attack could have a more significant impact on consumers' willingness to spend.

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