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Fed keeps rates steady calls for patience Original Source Link: (May no longer be active)
http://www.forbes.com/home_europe/newswire/2004/01/28/rtr1232648.htmlhttp://www.forbes.com/home_europe/newswire/2004/01/28/rtr1232648.html
UPDATE 4-Fed keeps U.S. rates steady, edges toward rises
Reuters, 01.28.04, 6:40 PM ET
(Updates with market close, Reuters poll of Wall Street bond dealers; adds analysis)
By Glenn Somerville
WASHINGTON, (Reuters) - The U.S. Federal Reserve took a tiny step Wednesday toward raising interest rates for the first time since 2000 by dropping a five-month-old pledge to keep them low "for a considerable period."
In a move that surprised and confused financial markets, the U.S. central bank's policy-setting Federal Open Market Committee said it "can be patient" about lifting its key overnight bank-lending rate target.
The Fed held the federal funds rate target at 1 percent -- a 1958 low reached last June -- but the statement it issued after the policy-setting meeting left traders with a sense it was preparing the ground for eventual rate rises, however vague the timing of any action might be.
"This seems like a baby step towards tightening," said economist Drew Matus of Lehman Brothers in New York. "However, it does not alter the fundamental outlook, which is that the Fed is not in any hurry to raise rates."
GOOD TIMES AHEAD
In a statement following a two-day meeting, the FOMC said economic activity was on the upswing since the last policy meeting on Dec. 9, implying a growing confidence the recovery from the 2001 recession was sustainable.
"The evidence accumulated over the intermeeting period confirms that output is expanding briskly," the FOMC said. "Although new hiring remains subdued, other indicators suggest an improvement in the labor market."
Stock prices fell as investors took profits in the apparent belief that higher rates are on the way -- something that could weigh on corporate profits. The Dow Jones industrial index slumped 141.55 points to close at 10,468.37 while the high tech-laden Nasdaq composite lost 38.67 points at 2,077.37.
Some Fed members had previously expressed concern at the idea of saying rates would be held low for any fixed period, so substituting the nonspecific patience phrase might be a way of easing those worries without committing to a course of action.
"While a relatively small nuance, the language change removes the perception that interest rates could stay unchanged throughout 2004," said economist Lynn Reaser of Banc of America Capital Management Inc. in St. Louis.
"With inflation quite low and resource use slack, the committee believes that it can be patient in removing its policy accommodation," the FOMC said without elaboration.
A poll of 23 primary dealers -- big Wall Street firms that deal directly with the Fed -- found little change in their rate forecasts in the wake of the FOMC decision. While six dealers foresaw a rate rise by the end of June, seven expected no hike before the second half of the year.
Another 10 primary dealers anticipated no change in U.S. rates before 2005.
MOST SIGNS POSITIVE
Most recent economic data have been positive, though not universally so. The economy expanded at a booming 8.2 percent annual rate in last year's third quarter and analysts expect the government on Friday will announce it grew at a solid 4.8 percent clip in the fourth quarter.
But with presidential elections in November, meager job creation since the 2001 slump has come under a harsh spotlight. Some 2.3 million jobs have been shed since President George W. Bush took office in January 2001.
Bush's economic team, including Treasury Secretary John Snow, have been at pains to note that employment growth typically lags in the early stages of recovery.
However, contenders for the Democratic presidential nomination say job insecurity is a gauge of the administration's inadequate economic policies.
Economist Rich Yamarone of Argus Research Corp. in New York said Fed policy-makers may have decided it was wiser to change the statement's wording now rather than later, knowing that any shift would cause some turmoil.
"Given that we're now into an election-year cycle, if they wanted to remove the 'considerable period' language, it was better to do so now because if they waited until, say, August, they might be accused of deliberately disrupting markets," Yamarone suggested.
The two-day meeting was one of two longer sessions the policy panel holds each year to help Fed Chairman Alan Greenspan prepare for his semiannual testimony on the economy before Congress.
His appearances before House of Representatives and Senate lawmakers on Feb. 11-12 will allow him to refine his views on the economy's health and to parry lawmakers' questions about why a more full-fledged recovery has not set in.
Copyright 2004, Reuters News Service
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