US Federal Reserve stays on fence amid uncertainty

Federal Reserve policymakers, blinded by a fog of economic uncertainty in the countdown to war in Iraq, held rates steady Tuesday at a four-decade low.

Policymakers, citing a clouded outlook, voted unanimously to leave the federal funds target rate, which banks charge each other for overnight loans, at 1.25 percent.

Taking no immediate action for an economy partially paralyzed by war and terrorism fears, they promised only "heightened surveillance" of developments.

Federal Reserve Chairman Alan Greenspan and his colleagues said they were disappointed by job losses, but predicted a recovery driven by low rates and high productivity once uncertainty was dispelled.

The Federal Open Market Committee (FOMC), meeting midway through a 48-hour US ultimatum for Iraqi leader Saddam Hussein to flee or face attack, declined to divine the economic outlook.

"In light of the unusually large uncertainties clouding the geopolitical situation in the short run and their apparent effects on economic decision making, the committee does not believe it can usefully characterize the current balance of risks," the FOMC said in a statement.

"Rather, the committee decided to refrain from making that determination until some of those uncertainties abate," it said.

For now, "heightened surveillance is particularly informative," the statement said.

On the economic front, latest data showed groundbreaking on building of new US homes slumped 11 percent in the month to February -- the biggest drop since 1994.

The housing news followed on the heels of a battery of data pointing to fragile economic growth.

Employers cut a net 308,000 jobs last month and consumer confidence plummeted to its lowest in a decade.

Oil prices, however, are sliding back from recent peaks as traders hope for a swift US-led victory. New York's benchmark light sweet crude contract for April delivery plummeted US$3.26, or 9.33 percent, to US$31.67.

Wall Street is on a rally. The Dow Jones industrials average of 30 top stocks rose 52.31 points, or 0.64 percent, to 8,194.23.

"While incoming economic data since the January meeting have been mixed, recent labor market indicators have proven disappointing," the FOMC statement said.

"However, the hesitancy of the economic expansion appears to owe importantly to oil price premiums and other aspects of geopolitical uncertainties," it added.

"The committee believes that as those uncertainties lift, as most analysts expect, the accommodative stance of monetary policy, coupled with ongoing growth in productivity, will provide support to economic activity sufficient to engender an improving economic climate over time," the statement said.

Most analysts had expected the policymakers to leave rates unchanged but to hold out the possibility of a future cut.

The FOMC usually releases a statement with a clear signal to the markets about whether it is leaning to a future lowering, raising or no change in rates.

Many analysts predict that the federal funds rate could be axed to a 45-year low of 1 percent as early as next month, possibly heralding deeper cuts later.