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Fed May Hold Rates as Iraq War Nears

The growing stack of negative economic reports could increase the changes of a cut later.

March 18, 2003|From Bloomberg News

Despite signs that the U.S. economy is faltering, most economists believe that the Federal Reserve won't cut its benchmark interest rate when it meets today.

The economy, while growing, has sputtered. Consumer confidence is the lowest since 1992, and February produced the bleakest jobs and retail reports since November 2001, just after the Sept. 11 attacks. What's been less clear is why, and that's one reason some economists say the Fed will move cautiously.

"What we don't know is whether the cause is weather and geopolitical risk, some fundamental change in baseline growth, or a combination of all of the above," said Kathleen Stephansen, director of global economic research at Credit Suisse First Boston, one of 22 bond firms that deal directly with the Fed. "Making a monetary policy change amidst this uncertainty won't buy the Fed a great deal of additional growth."

Forty-eight of 57 economists polled by Bloomberg News say the Fed's policymaking Open Market Committee will leave the overnight lending rate unchanged at 1.25%, the lowest since 1961.

Still, the growing stack of negative economic reports makes it likely the Fed will change its outlook and say the economy is at risk of weakening, increasing the chances of a rate cut later.

Fed Chairman Alan Greenspan last month told the Senate Banking Committee that the "most important stimulus is the removal of uncertainties" about Iraq. His statement that the economy didn't need an additional boost made President Bush's $726-billion tax-cut plan tougher to sell to Congress.

Some of the questions about Iraq may begin to lift soon. Bush Monday night gave Iraqi leader Saddam Hussein an ultimatum to go into exile within 48 hours or face an invasion.

Along with Mideast tensions, a bleak job market and a surge in gasoline prices are undermining confidence. The 40% average gain in gas prices over the last 12 months is limiting the amount of cash consumers have for other goods and services.

"Consumers have ample reason to be gloomy right now," said Stephen Stanley, an economist at RBS Greenwich Capital Markets in Greenwich, Conn.

A shift in the Fed's outlook to say the economy risks further weakening would increase the likelihood of a rate cut at or before the May meeting, a possibility that some traders bet is a near certainty. Futures contracts on federal funds for May settlement yield 1.1%, 15 basis points below the target.

Growth is slowing around the world, and other central banks have been cutting rates. Earlier this month the European Central Bank lowered its benchmark rate by a quarter of a point to 2.5%, the lowest in almost 3 1/2 years. In February the Bank of England cut its benchmark to 3.75%, the lowest since 1955, Winston Churchill's last year as prime minister.

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