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Thu, Mar 21, 2002 - Page 21 News List

US Fed shifts on recession stance

OUTLOOK The US Fed on Tuesday dropped its warning that weakness poses as threat to the American economy, a shift suggesting likely rate hikes later this year


Pat Dempsey, center, trades in the Fed Pit at the Chicago Board of Trade on Tuesday in Chicago. The US Federal Reserve left a key interest rate unchanged Tuesday and began preparing Americans for the possibility that short-term rates will go higher this year as the US bounces back from recession.


The US Federal Reserve on Tuesday left interest rates unchanged and set the stage for future increases by dropping its long-held recession warning, saying the US economy was growing at a "significant pace."

Policymakers -- who waged war against economic weakness last year with 11 interest rate cuts -- voted unanimously to leave the federal funds rate, which influences borrowing costs economy-wide, unchanged at a 40-year low of 1.75 percent. The more symbolic discount rate was also unmoved at 1.25 percent.

In a statement after the one-day meeting, the Federal Open Market Committee dropped its 15-month-old warning that weakness posed the greatest threat to the economy and said risks were now more evenly balanced between inflation and weakness.

Analysts said this shift in rhetoric marks the Fed's first step toward likely rate increases later in the year. Many of the firms that work closely with the central bank expect it to raise interest rates as early as June to keep inflation fires banked as the recovery gathers steam.

"They have decided to move sooner rather than later in terms of a hike in interest rates," said Sung Won-sohn, chief economist at Wells Fargo Bank in Minneapolis, predicting a rate increase could come as soon as May.

A poll by Reuters of Wall Street firms that deal directly with the Fed said 14 of 24 firms see a rate rise at the June 25-26 meeting. However, firms were unanimous in expecting the policymakers to hold rates steady when they gather May 7. In a poll conducted on Friday, a third of the dealers saw a June rate increase.

While the central bank noted that the economy, fueled by a pickup in business spending on inventories, is now expanding at a spanking clip, it warned that solid growth cannot endure without strong demand from businesses and consumers.

Fed watch

* The US Fed voted unanimously to leave the federal funds rate unchanged at a 40-year low of 1.75 percent.

* A poll of Wall Street firms that deal directly with the Fed said 14 of 24 firms see a rate rise when the Fed meets in late June.

* The Fed is also scheduled to meet on May 7, but the Wall Street firms were unanimous in expecting the policymakers to hold rates steady.

"The economy, bolstered by a marked swing in inventory investment, is expanding at a significant pace," the FOMC said in its statement. "Nonetheless, the degree of the strengthening in final demand over coming quarters, an essential element in sustained economic expansion, is still uncertain."

That caveat left analysts believing that the Fed will need more signs of improvement before deciding to raise rates.

Uncertainty remains

"The tone is still suggesting that final demand and whether the economic expansion will be sustained is uncertain," said Jeffrey Kleintop, chief investment advisor at Pittsburgh-based PNC Advisors. "The Fed's still unsure about the economic recovery and I think that's probably more of [a] detriment to confidence in the near term."

While the wording shift was expected, the Fed did take an unforeseen step toward openness -- disclosing policymakers' votes in the post-meeting statement. In the past, the central bank has released vote details with the minutes of the meeting but these do not come out until after the next meeting.

FOMC members voted 10-0 to leave rate untouched.

"Unless growth is strong, excluding inventories, they are not likely to push the panic button," said Anthony Chan, chief economist at Banc One Investment Advisers in Columbus, Ohio. "They are going to be looking very closely at final demand."

At its last meeting on Jan. 29-30, the Fed left rates untouched and retained its warning that risks were tilted toward weakness, even while saying the economic outlook had "become more promising."

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