Tags: Fed | Expected | Leave | Rates | Unchanged

Fed Expected to Leave Rates Unchanged

Tuesday, 29 January 2002 12:00 AM

Analysts said, however, there will be a brighter interpretation of the Fed's decision, presuming it is borne out, to end the cycle of interest rate reductions. Experts said it would suggest the economy is getting healthy enough on its own so as not to require further stimulus.

Wall Street is looking to the Fed's decision on rates at the end of its two-day meeting Wednesday for confirmation the economy is recovering.

The nation's top bank cut its target for short-term rates 11 times in 2001, a record for a calendar year, to fight the effects of a recession that likely began in March and was worsened by the Sept. 11 terror attacks.

Analysts said the recent signs the labor market, consumer spending and manufacturing are stabilizing have led many to believe the Fed's rate-cutting days are over for the time being.

Last week's upbeat comments by Fed Chairman Alan Greenspan, explicitly designed to contradict an apparently gloomier outlook delivered on Jan. 11, cemented the idea the Fed will leave rates alone this week, experts said.

In testimony, Greenspan told Congress last Thursday the economy is beginning to recover.

"There have been signs recently that some of the forces that have been restraining the economy over the past year are starting to diminish and that activity is beginning to firm," the nation's chief central banker said.

Greenspan's sunny comments further eroded expectations the Fed will cut rates for a 12th time on Wednesday, experts said.

Greenspan also said it was an open question whether the economy needs any additional fiscal stimulus. "I don't think it's critically important," he said because the economy seems to be recovering without it.

But some extra stimulus could help later in the spring or summer, he said, noting both consumer and business spending are likely to be somewhat "tepid" compared with past recoveries.

Fed policy makers have cut short-term rates 11 times already from the 6.5 percent level at the beginning of 2001 to the current 1.75 percent -- its lowest level since July 1961.

The central bank cut rates at each of its eight scheduled meetings last year and during three impromptu conference calls. Three of the reductions occurred after the Sept. 11 terrorist attacks in New York and Washington.

The Fed controls monetary policy by changing interest rates and the amount of money in circulation.

The Fed, in theory and by law, is supposed to keep the economy at full employment while maintaining price stability.

Lowering interest rates often lead to decreases in long-term rates businesses and consumers pay. When interest rates decline, businesses expand and consumers have more money to spend.

Analysts said, however, with some banks, major department stores and credit card companies still charging as much as 22 percent for the right to use a credit card, plus unusually high late fees and a shorter billing cycle, consumers are not rushing out and make major purchases.

Starting in 1999, the Fed embarked on a year-long campaign of rate increases meant to cool the economy to forestall inflation.

Under a policy announced on Jan. 19, 2000, the FOMC issues, shortly after each of its meetings, a statement that includes its assessment of the risks in the foreseeable future to the attainment of its long-run goals of price stability and sustainable economic growth.

The federal funds rate is the rate banks charge each other for overnight loans and sets the stage for most other short-term rates and ultimately influences long-term rates, such as mortgage interest rates, credit cards and business loans.

The Federal Open Market Committee consists of 12 members: the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and, for the remaining four memberships that carry a one-year term, a rotating selection of the presidents of the 11 other Reserve Banks.

The FOMC holds eight regularly scheduled meetings per year to direct the conduct of open market operations by the Federal Reserve Bank of New York in a manner designed to foster the long-run objectives of price stability and sustainable economic growth.

The FOMC also establishes policy relating to System operations in the foreign exchange markets.

The Fed's decision on rates was expected at approximately 2:15 p.m. EST on Wednesday.

Copyright 2002 by United Press International. All rights reserved.

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Analysts said, however, there will be a brighter interpretation of the Fed's decision, presuming it is borne out, to end the cycle of interest rate reductions. Experts said it would suggest the economy is getting healthy enough on its own so as not to require further...
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2002-00-29
Tuesday, 29 January 2002 12:00 AM
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