Posted on 01/28/2003 10:44:19 PM PST by Timesink
WASHINGTON (Reuters) - The prospect of an Iraq war and promise of new tax breaks will likely sway Federal Reserve policymakers into holding interest rates at four-decade lows when they end 2003's first rate-setting meeting on Wednesday.
While a recent run of data has shown the U.S. economy remains in a rut with huge job losses, economists believe the central bank must hold off on rate cuts for now and wait out any uncertainties of war.
"There are major concerns that war is coming and it will have a negative impact on the economy. If that is indeed correct, this economy is going nowhere until the Iraqi situation is resolved. And there is nothing the Fed can do about it," said Joel Naroff of Naroff Economic Advisors in Holland, Pa.
There have already been 12 rate cuts since the economy sank into recession in 2001 and many analysts believe the central bank will think hard before adding more easing.
Fed policymakers will announce their interest rate decision and release a brief statement about the economy on Wednesday around 2:15 p.m. (1915 GMT).
They are widely expected to hold rates steady. There are, however, some economists who believe they may shift their assessment of risks facing the economy to say there is a danger of weakness, a warning they dropped late last year.
"They (Fed policymakers) actually don't believe at this junction that the economy needs that much more stimulus," said Anthony Chan, chief economist at Banc One Investment Advisors in Columbus, Ohio.
STIMULUS PACKAGE EXPECTED
Chan and others say the Fed is likely confident Congress will pass some form of fiscal stimulus such as tax breaks intended to boost business spending and economic growth.
Such moves may be in line with a long-term $670 billion package that the Bush administration has proposed, or with shorter-term proposals put forth by Democrats.
"I think that the central bank is aware that we are likely to see some stimulus package being passed. They certainly don't want to be participating in any kind of policy overkill strategy," Chan said.
Boosting the U.S. economy was one of the first themes President Bush addressed in his State of the Union speech late on Tuesday.
Bush said that while the economy was improving after the setbacks of recent years, it was not growing quickly enough.
"We must have an economy that grows fast enough to employ every man and woman who seeks a job," Bush said. "After recession, terrorist attacks, corporate scandals, and stock market declines, our economy is recovering -- yet it is not growing fast enough, or strongly enough."
However, he did not detail any new economic initiatives beyond the stimulus plan outlined earlier this month.
Even though the economy has appeared vulnerable in recent months, all 22 primary dealers that deal with the Fed anticipated no change in the 1.25 percent federal funds rate, according to a Reuters poll. That rate, which governs overnight loans between banks, is at its lowest since July 1961.
"The Fed is sitting on its hands hoping for the best," said Rory Robertson, interest rate strategist at Macquarie Equities in New York.
Four of the dealers surveyed, however, expected the Fed to rethink its assessment of risks. After a surprise half percentage point rate cut in November, the Fed said economic dangers were balanced between inflation and slower growth.
And many say another rate cut could come as early as March, when the FOMC meets again.
"I expect to see another rate cut sometime before mid-year. Whenever employment is shrinking people will keep their eyes open," said Robertson.
MODEST GAIN IN DURABLE GOODS
There has not been much room for optimism in the latest data. Businesses are still wary about spending, according to the Commerce Department's latest report.
Orders for big-ticket manufactured goods rose modestly in December, but the gain was smaller than expected and, excluding defense-related items, orders fell for the month.
The Commerce Department will release its first estimate of U.S. fourth-quarter economic growth on Thursday. Economists polled by Reuters forecast, on average, that the economy grew by a scant 0.7 percent during the quarter.
Consumer spirits drooped for the second month in a row, a report out Tuesday from the Conference Board showed. The private research firm's Consumer Confidence Index fell to a nine-year low in January as joblessness and war fears sapped consumers' hopes for the economy over the next six months.
"It's pretty clear that the risks of economic weakness far outweigh the risks of inflation down the track," said MacQuarie's Robertson.
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