Subscribe to Money Magazine
CNN/MoneyWeb
News > Jobs & Economy
graphic
More Fed coverage
Fed likely to stand pat
Central bank almost certain to hold rates at 43-year low, keep policy unchanged at meeting.
January 28, 2004: 1:50 PM EST
By Mark Gongloff, CNN/Money staff writer

NEW YORK (CNN/Money) - With the economy sprinting but generating little inflationary heat, the Fed is likely to keep the accelerator on the floor and hold a key interest rate at the lowest level in more than 40 years when policy-makers meet.

 QUICK VOTE 
What should the Federal Reserve do at its policy-making meeting?
  Leave rates alone
  Cut rates
  Raise rates

   View results

The Federal Reserve's policy-making committee met for a second day Wednesday. Economists believe it will keep the federal funds rate, an overnight bank lending rate that is the basis for many banks' prime rates, at 1 percent, a level not seen consistently since 1961.

Almost unanimously, according to recent polls by Reuters and other news organizations, economists expect the Fed will leave the fed funds rate alone.

The Fed is charged with keeping inflation under control and American workers at full employment. With inflation apparently dead in the water, jobs will be the Fed's focus for the next several months, and it's not clear the labor market is ready to be taken off life support.

Though layoffs have slowed, and some economists hope Labor Department revisions will make December's very weak jobs report look a lot prettier, many doubt the revisions will be enough to change a picture of a labor market nowhere near full health.

"If you look at the last jobless recovery, the Fed was on hold for a good, long time," said former Fed economist Wayne Ayers, now chief economist at Fleet Boston Financial. "When they did reverse course, the economy had produced 4 million jobs from the trough in the labor market. We're nowhere near that -- even with [payroll data] revisions, which I suspect will be on the tepid side, we won't be near that."

Until the Fed gets ready to start fiddling with interest rates, economists will hang on central bankers' every word, including the statement accompanying the Fed's interest-rate decision, due Wednesday afternoon.

After its last meeting in December, the Fed said that, despite "briskly expanding" output and a "modestly improving" labor market, inflation was "quite low," meaning it could afford to keep interest rates low for a "considerable period." Most economists expect to see similar language again Wednesday.

"They will convey more or less the same message -- that the economy is looking better, but nothing that would convey the notion that they're going to be moving rates any time soon," said Joshua Feinman, chief economist with Deutsche Bank Asset Management.

Inflation in the pipeline?

Some analysts worry that, by waiting too long to raise interest rates and leaving the economy running at top speed, the Fed may be helping to create runaway inflation -- either in consumer prices or by inflating a dangerous bubble in stocks or home prices -- that could come back to cripple the economy.

Related stories
graphic
Prettying up the job market
Hayswire: Rates and Bush -- better lucky?
Economy gets a B+
CPI posts slight gain
Fed on hold until 2005?

They've got some evidence backing them up, too: gold and raw material prices have surged, the dollar has weakened, and the gap in the yields of inflation-protected Treasury bonds and normal Treasurys is widening – all leading indicators of inflation.

But that inflation hasn't appeared in broader measures yet. The Fed's favorite gauge, a Commerce Department reading on consumer price inflation, grew at its slowest pace in history in the 12 months ended in November. For better or worse -- depending on how worried you are about the prospects for inflation -- that means the Fed could stay on hold for a while.

"With the U.S. economy hot and global growth accelerating, the issue of Fed tightening has become the conceptual equivalent of pondering a possible California earthquake," said Russell Sheldon, senior economist at BMO Nesbitt Burns. "It's going to happen, but probably not tomorrow, and participants would rather not think about it."

Fire, but no heat

Labor-market weakness is the prime culprit in keeping inflation low, according to Fed Governor Ben Bernanke and some other economists. Technology-driven productivity gains have allowed companies to squeeze more work out of fewer workers, and many firms are sending work overseas, where labor costs are much cheaper.

As a result, the economy has been able to grow like gangbusters without adding many jobs -- last month the U.S. generated just 1,000 new jobs, versus forecasts for a gain of about 150,000. And despite the pickup in economic growth, wage and salary growth -- by far the biggest component of consumer price inflation -- have been held in check.

And it could slow down even more, according to a note Friday by Citigroup's chief U.S. economist, Robert DiClemente.

DiClemente said the amazing gap between robust economic growth and inflation could mean productivity -- worker output per hour -- will continue to be stronger than most analysts expect.

Fueled by technological innovation, productivity grew at a 5.4 percent pace in 2003, the fastest in 53 years. Most economists believe it will -- in fact, must -- slow down in 2004, and that businesses will be forced to start hiring in bigger numbers to keep up with demand.

But DiClemente said sluggish growth in new jobs and average worker earnings, among other things, are starting to raise questions about just how much slack the economy will take up, even if it grows at a strong pace throughout 2004.

"Under these conditions, policy makers will want to maintain a continued period of very low interest rates and highly accommodative financial conditions to propel aggregate demand well above the upper end of reasonable estimates of potential growth," DiClemente wrote.

When will the rate hike come?

In other words, the Fed's pedal may stay pressed to the metal for quite some time -- until 2005, according to some economists.

YOUR E-MAIL ALERTS
Alan Greenspan
Economic Indicators
Federal Reserve

But some in the financial markets disagree. In the fed funds futures market, where traders bet on Fed policy moves, the numbers show these traders believe there's a decent chance the Fed will start raising rates by the late summer or early fall.

And most economists agree. A recent Bloomberg poll found that 13 out of 23 economists expected a rate hike in 2004, and the Economic Advisory Committee of the American Bankers Association said Friday it expects a hike as early as June.

Some of these analysts say the Fed won't wait for higher inflation to start raising rates, but just for signs that the labor market has truly healed, something that could come later this year, according to some forecasters.  Top of page




  More on NEWS
JPMorgan dramatically slashes Tesla's stock price forecast
Greece is finally done with its epic bailout binge
Europe is preparing another crackdown on Big Tech
  TODAY'S TOP STORIES
7 things to know before the bell
SoftBank and Toyota want driverless cars to change the world
Aston Martin falls 5% in its London IPO




graphic graphic

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.