Fed unlikely to raise rates today

Experts say economy is still too weak, predict increase later this year

May 07, 2002|By Bill Atkinson | Bill Atkinson,SUN STAFF

The nation's economy may be growing, but not enough to convince Federal Reserve policy-makers to boost interest rates when they meet today, some economists predicted yesterday.

The economists say they expect the Federal Open Market Committee - the Federal Reserve's rate-setting arm - to leave the benchmark overnight rate at its 40-year low of 1.75 percent given that the economy's condition is still delicate.

The Fed will do "absolutely nothing," said Robert B. MacIntosh, chief economist at Eaton Vance Management, a mutual fund company in Boston. "The economy is growing at a very slow snail's kind of pace right now. I can't imagine they [the Fed] would have any other conclusion."

Some experts worried the Fed would soon raise interest rates after the gross domestic product - the country's total output of goods and services - grew at a 5.8 percent annual rate in the first quarter.

But now economists are seeing signs that the economy is slowing from its blistering first-quarter pace and the Fed will have to hold pat.

"I'm sure the Fed would be loath to raise rates in this environment knowing the high level of consumer debt that is out there," said Sharon L. Stark, chief fixed-income strategist at Legg Mason Wood Walker Inc. in Baltimore. "Raising rates would exacerbate the problem."

Household debt as a percentage of disposable income shot up to 14.3 percent in last year's fourth quarter, nearly matching its peak of 14.38 percent in the fourth quarter of 1986, Stark said.

April's unemployment rate, which hit 6 percent - the highest level in nearly eight years - is another factor, economists said.

While unemployment rose because of a flood of new job applicants looking for work, "it has a psychological effect on consumers," Stark said. "Until that rate stabilizes and comes down, I think it will cause the Fed to stay where they are."

There are other problems, too, experts said. Rising energy prices are eating into consumers' wallets and corporate profits. Consumer confidence, which drives consumer spending, fell in April, and corporate investment is still sluggish.

"There doesn't seem to be any light at the end of the tunnel ... for business investment," MacIntosh said. "There is still no sign of any kind of turnaround in business investment."

The stock market, which is believed by many experts to forecast the economy six to nine months in the future, has struggled, and yesterday indexes fell across the board. The Dow Jones industrial average tumbled 198.59 points, or 1.98 percent, to 9,808.04. It has closed lower seven of the last 11 trading days.

"There has been such negativism [in the markets]," said Michael R. Englund, chief market economist at Standard & Poor's in New York. "Concern about earnings in general is what is really driving the market."

Englund said the market does not expect the Fed to make a move with interest rates at it meeting today.

Many economists expect the Fed to raise rates either at its Aug. 13 meeting or in the fall if the economy starts growing faster. The Federal Open Market Committee holds eight regularly scheduled meetings a year.

Englund expects the Fed to raise rates when it meets in September. "We think we are in an expansion," he said. "We think ultimately the risks are balanced toward rapid growth and inflation. By the end of the year, I think they are going to have to be in a tightening mode."

Englund sees the Fed raising rates in small increments - quarter-of-a-percent moves because that has been the strategy of Fed Chairman Alan Greenspan.

"Starting early with small moves is a better plan over waiting too long and being forced to raise rates more aggressively," Englund said.

MacIntosh, however, doesn't see a rate increase this year.

"It is not as if the economy is revving up," MacIntosh said.

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