Tags: Economy | Improving | Fed | Leaves | Interest | Rates | Alone

Economy Improving, Fed Leaves Interest Rates Alone

Wednesday, 30 January 2002 12:00 AM

Fed Chairman Alan Greenspan and his colleagues opted to keep the federal funds rate - the interest that banks charge each other on overnight loans - at 1.75 percent. The decision was announced after a two-day closed-door meeting.

"Signs that weakness in demand is abating and economic activity is beginning to firm have become more prevalent," the Fed said in a statement explaining its decision. "With the forces restraining the economy starting to diminish ... the outlook for economic recovery has become more promising."

Initial reaction to the news was positive.

"I think it's good news," said Scott Grannis, chief economist for Western Asset Management Co.

"We may be entering a period of prolonged stability in short-term rates," Grannis predicted. "And I think the bond market will feel better knowing that the Fed is largely done. I don't expect any big things to be happening from the Fed for the rest of the year."

Grannis noted that the Fed's decision to hold steady on rates was not a surprise. "That's always good, too," he said. "No surprises, no changes and no need for any big changes."

But the Fed's report was far from rosy. "They do cite the fact that the risks seem to be weighted on the side of economic weakness," Grannis noted, "so that still leaves open the possibility of some more cuts. The evidence of a bottoming in the economy is slowly accumulating.

"When all is said and done, they probably won't need to do much more," said Grannis.

Brian Wesbury, chief economist for the investment company Griffen, Kubik, Stephens & Thompson, also welcomed the Fed's decision Wednesday.

"They have cut interest rates so rapidly and by such a huge amount in the past year that they are now running the risk of going too far," said Wesbury.

In fact, Wesbury believes the Fed should, and will, raise interest rates sometime this year, perhaps as early as July.

"I believe the economy will recover this year," he explained. "I think that we are going to see the economy hitting on all cylinders by the third quarter of this year." The 1.75 percent interest rate will be too low if the economy is growing at a 3 percent rate by the third quarter, said Wesbury.

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Fed Chairman Alan Greenspan and his colleagues opted to keep the federal funds rate - the interest that banks charge each other on overnight loans - at 1.75 percent. The decision was announced after a two-day closed-door meeting. Signs that weakness in demand is abating...
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Wednesday, 30 January 2002 12:00 AM
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