The Federal Reserve probably will leave the overnight lending rate at a 40-year low today, waiting instead until hiring and business investment improve before increasing borrowing costs, economists say.
Inflation isn’t a problem, and that also gives the policy-setting Federal Open Market Committee the chance to keep the rate at 1.75 percent, where it has been since December. The committee finishes two days of discussions with an announcement expected at about 2:15 p.m. Washington time.
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“Given the ongoing weakness in employment, business investment and equity markets, there will be little or no discussion of rate rises,” said Rory Robertson, an interest-rate strategist at Macquarie Equities in New York.
The Fed’s post-meeting statement is likely to cite “balanced” risks between inflation and growth, economists say.
Chairman Alan Greenspan probably will make the same assessment when he goes before Congress in July to give the Fed’s twice-yearly forecast, which officials are helping prepare at the meeting. Any suggestion of higher rates now or in the near future may hurt the consensus that the economy is gaining strength.
The recovery is “neither gangbusters nor sub-par,” said Kathleen Stephansen, director of global economic research at Credit Suisse First Boston Inc.
Rate Cut?<br>
Some investors don’t rule out the possibility that the next move may be a rate cut. Two-year U.S. Treasury yields, among the most sensitive to Fed rate expectations, fell almost a quarter percentage point to 2.6 percent today.
Other Treasury rates fell after WorldCom Inc. said it misstated earnings. Investors sold stocks on mounting concern that other U.S. companies may be inflating revenue, and that this will stall the economy.
“It’s impossible to rule out the possibility of a rate cut by the Fed after this,” said Kazutoshi Nakade, who helps oversee 200 billion yen ($1.66 billion) at Mitsui Sumitomo Insurance Asset Management Co.
“WorldCom is causing investors to question whether they can really believe earnings statements, and that is leading to a flight to quality.”
Survey
A Bloomberg News survey of 22 Wall Street bond firms that trade directly with the Fed shows that two forecast a rate increase in August, down from 16 a month ago. Seven expect the Fed to act in September, and three aren’t predicting a change until next year — up from one a month ago.
Right now, some economic indicators are turning from declines to gains. Industrial production has risen for five straight months. Still, increases in everything from jobs to factory orders haven’t taken up the slack in labor markets or industrial capacity.
In March and April combined, the U.S. economy created 47,000 jobs. Still, those two months of payroll gains doesn’t make up for the 1.76 million jobs lost over the previous 12 months.
While orders for factory goods have risen for three of the last four months, companies are meeting demand without making new investments in buildings or equipment. Such spending has fallen for six consecutive quarters.
“Companies are not yet comfortable with the sustainability of the U.S. recovery,” said Gregory Miller, chief economist at SunTrust Banks Inc. in Atlanta.
Stock Decline
The decline in stock prices may be worsening the damage to consumer confidence from sluggish job growth. Confidence fell during June by the most since September’s terrorist attacks, according to a Conference Board index released yesterday.
At Tuesday’s close, the Standard & Poor’s 500 Index was down 14 percent for the year. Robert Parry, president of the San Francisco Fed Bank, said last week that doubts about the economic recovery “have been intensified by concerns about corporate accounting practices and about the recent declines in broad stock market indexes.”
While economists and investors keep pushing back their expectations for when central bankers will act, Fed officials do say they will at some point have to raise the overnight rate, now lower than would be considered normal during times of growth.
Parry called the current rate “stimulative” last week. The Fed itself called it “accommodative” in its statement May 7 announcing no change in monetary policy.
Bloomberg News
