Feds to Steer Cautious Path

September 24, 2002

The US Federal Reserve is discussing interest rates, amid growing concerns about the fragility of the country's economic recovery.

Fears that the world's biggest economy might succumb to a "double-dip" recession, coupled with the prospect of Middle East War, helped push stock markets lower around the world ahead of the meeting.

The main US technology stocks index, the Nasdaq, finished at a six-year low on Monday.

However, most economists expect the US Federal Reserve's Open Market Committee (FOMC) will leave interest rates unchanged at their current 40-year low of 1.75%.

Watching the horizon

Economists believe Fed chairman Alan Greenspan would have flagged up any intention to adjust interest rates in Congressional testimony to the House Budget Committee last week.

Economists are likely to focus keenly on what the FOMC says about the outlook for the US economy.

For months, Mr Greenspan and other FOMC members hinted that growth in the latter part of 2002 might justify a return to interest rate rises.

The Fed officially adopted a more cautious view at its August meeting, saying that weak demand had been "prolonged" by a mix of weak financial markets and corporate scandals.

Then, issuing its September snapshot, the Beige Book, the Fed reported that growth was "slow and uneven" with a mixed performance among retailers and "sluggish" activity in the manufacturing sector.

Nevertheless, the Fed seems confident that current low interest rates are sufficient to keep the economy climbing out of last year's recession.

Manageable risk

Fed officials "have sent a strong message that absent clear and present danger, they aren't going to do anything," said Russ Shelton, an economist at Nesbitt Burns.

"I think the Fed would be very cautious about cutting rates," said Sung Won Sohn, chief economist at Wells Fargo. "I think the economy would have to be in imminent danger."

The latest indications of how the economy is doing paint a mixed picture.

Economists' estimates of growth for the three month period to September are running at about 4% - healthy enough.

Confidence stumbles

But an influential survey of economic activity from the Conference Board research group on Monday dropped for the third month in a row.

Consumer sentiment figures on Friday will now be watched closely for any signs of a downturn, given that the retail sector makes up two-thirds of the economy.

Rising joblessness has also been causing concern. Unemployment is currently 5.7% and expected to increase.

Falling stock markets have helped puncture economic confidence, risking triggering a spiral of weaker demand and weaker markets.

But the Fed would be unlikely - and unwise - to cut rates in response to market falls "unless they are very sharp... and there is collaborating weakness in the economic figures," said SG Economics.

http://news.bbc.co.uk/2/hi/business/2278144.stm