The US is set to cling to 40-year low interest rates for months to come, as doubts linger over the second stage ignition of the US recovery, economists said.
Federal Reserve policymakers, scheduled to review interest rates at a meeting tomorrow, are unlikely to take any action beyond sipping their cups of coffee, the experts said.
Latest figures showing the US unemployment rate shot up to 6 percent in April -- the highest level in nearly eight years -- wiped out all speculation of a rise in rates before August, they said.
The data underscored a fundamental question about the US recovery; how durable is it?
A sudden spurt of growth in the first quarter, when economic output grew at an annualized rate of 5.8 percent, was fuelled by companies rebuilding inventories. And that fuel is running out.
Now, economists say, final demand from consumers, businesses and exporters must kick in.
US Federal Reserve chairman Alan Greenspan will wait for confirmation that all is well before beginning to unwind the dramatic rate cuts of last year, when the federal funds rate was slashed to 1.75 percent from 6.5 percent, said Naroff Economic Advisors president Joel Naroff.
The jobs data, while possibly marking the low point for the distressed labor market, were unlikely to provide that assurance, he added. "Thus, the chances of any Fed action before August are growing slimmer by the day."
Earlier in the week, a key survey by the Institute for Supply Management showed US factories stepping up activity in April but at a slower pace than in March.
"Next week's meeting should consist of coffee and 'how are you doing?' not, 'let's make a move,'" Naroff said.
Across the financial markets, expectations of a rise in US rates have switched from the June 25-26 meeting of the Federal Open Market Committee to the August 13 gathering or even later.
Greenspan himself stressed last month that he was in no rush to raise interest rates, with little sign of inflation to pressure him into earlier action.
Signs of a strengthening economic recovery were accumulating, he said.
"The pickup in the growth of activity, however, will be short-lived unless sustained increases in final demand kick in before the positive effects of inventory investment dissipate," Greenspan said.
Despite the caution, most analysts detected encouraging signs in the economy.
"The unexpected jump in the unemployment rate to 6 perent will receive a full airing among recovery skeptics," said a report by Salomon Smith Barney's US economic team, led by Bob DiClemente.
"But the spike in the unemployment rate and the relatively tepid job growth of last month in no way counters the positive trends developing beneath the surface."
In fact, household activity appeared to be robust, provoking a response from businesses, it said.
"Lingering concerns about the recovery's vigor, investor skittishness and a patient Federal Reserve are keeping bonds well bid," the report said. "However, as recovery unfolds further, the underlying tilt toward higher interest rates will become clearer."
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