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Jan 28, 1:47 AM (ET)
By JEANNINE AVERSA
WASHINGTON (AP) - Jobseekers still find it difficult to get work and
businesses aren't yet firing on all cylinders, leading economists to predict that
the Federal Reserve will hold short-term interest rates at super-low levels in
the months ahead. With inflation under wraps even as the economy has gained
momentum, the Federal Reserve has leeway to stay its monetary policy course, analysts
said. "The state of the economy is strong to robust. The one question mark
remaining in the economy is the labor market," said Tim O'Neill, chief economist
at BMO Financial Group. The nation's payrolls grew by a minuscule 1,000 in
December, raising new concerns about the fragile state of the labor market. The
unemployment rate dipped to 5.7 percent, but that was mainly because thousands
of prospective workers gave up looking. The economy has lost 2.3 million jobs
since President Bush took office in January 2001. The president believes a stronger
economy will lead to more jobs. Democrats point to the job losses as evidence
of what they say are the president's failed economic policies. O'Neill and
some other analysts are hopeful stronger job growth will take place later this
year as businesses feel more confident in the economy and see their bottom lines
improve. Against that backdrop, economists widely expect Fed Chairman Alan
Greenspan and his Federal Open Market Committee colleagues - the group that sets
interest-rate policy in the United States - to hold the federal funds rates steady
at a 45-year low of 1 percent at the end of a two-day meeting Wednesday. An afternoon
announcement was expected. The funds rate- the interest that banks charge each
other on overnight loans - is the Fed's primary lever to influence economic activity.
By holding the funds rate steady, consumers and businesses might have an incentive
to spend and invest more, and thus boost economic growth, economists said. 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. Analysts
also expect Fed policy-makers will retain a pledge to keep short-term rates at
near rock-bottom levels for a "considerable period." Some economists predict
the Fed will leave rates alone throughout this year and into 2005. That would
be good news for America's borrowers and consumer-sensitive industries such as
housing, which has seen sales soar as low interest rates proved too good for many
buyers to pass up. Low rates also have put downward pressure on the value of
the U.S. dollar compared with other currencies. That's been a welcome development
for U.S. manufacturers because it makes their goods less expensive for foreigners
to buy - something that has helped to boost U.S. exports in recent months. Others,
however, believe the Fed will begin to nudge up rates later this year. "The
Fed still has an emergency level in place when it comes to monetary policy but
the emergency is no longer around," said Carl Tannenbaum, chief economist at LaSalle
Bank. He predicts the Fed will bump up rates in June and again after November's
elections, leaving the funds rate at around 2 percent. The Fed cut the funds
rate by one-quarter percentage point to 1 percent on June 25. In meetings after
that, policy-makers have opted to leave the funds rate unchanged. The economy
grew at blistering 8.2 percent rate in the third quarter of 2003 _the strongest
performance in nearly two decades. Economists believe economic growth slowed to
a rate of around 4 percent to 5 percent in the final quarter of last year, which
would still be brisk. The government on Friday will release its first estimate
of economic growth for the fourth quarter. Economic growth in the current quarter
is projected to be solid - at a rate of just over 4 percent, economists said.
"The bottom line is that the economy is doing well. The missing piece: a full
recovery of the job market," said Stuart Hoffman, chief economist at PNC Financial
Services Group. Economists also believe Fed policy-makers will discuss ways
to improve their communications with Wall Street and Main Street. The Fed appointed
a working group last year to look into the matter.
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