Fri, Feb 01, 2002 page21

• US Fed keeps bank rate at 1.75 percent

  MAINTAINING INTEREST The Federal Reserve board decided to put the breaks on the most dramatic series of rate cuts since the early 1960s on signs of a rebound

  • BLOOMBERG
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  Federal Reserve policy makers left the benchmark US interest rate unchanged for the first time in a year and said the economy is beginning to recover from a recession that started last March.

  "Signs that weakness in demand is abating and economic activity is beginning to firm have become more prevalent," the Fed said in a statement.

  The decision may bring an end to the most aggressive series of rate reductions in Alan Greenspan's 14-year tenure as Fed chairman. Since an emergency rate cut on Jan. 3 last year, central bankers have lowered the target rate for overnight loans between banks 11 times by a total of 4.75 percentage points to combat the economy's weakness.

  With the overnight rate now at a 40-year low of 1.75 percent, policy makers decided against another cut. At the same time they said the rebound may falter. That suggests the Fed is likely to leave rates low for some time to allow the recovery to take hold.

  "It's really a great sign that the Fed was saying that they've seen enough pieces of the recovery in the near term that additional rate cuts are not required,'' said Mark O'Brien, chief executive officer of Pulte Homes Inc, the largest US builder.

  Stocks rose and Treasury securities fell. The Dow Jones Industrial Average climbed 145 points, or 1.5 percent, to close at 9,762.86. The NASDAQ Composite Index rose 20 points, or 1.1 percent, to close at 1,913.44. The 5 percent Treasury note that matures in August 2011 fell 0.5 points, pushing up its yield 7 basis points to 5.01 percent. A basis point is equal to 0.01 percentage points.

  Recent reports point to a rebound, which some analysts credit to the rate cuts.

  "The fact that the Fed has been very aggressive" led to a pickup in spending, said Van Jolissaint, chief economist at DaimlerChrysler AG's Chrysler unit.

  The economy unexpectedly expanded in the final three months of last year after contracting in the third quarter. The number of workers filing new claims for jobless benefits fell a week ago to a six-month low. Consumer optimism, as measured by the Conference Board, rose this month and is now higher than before the September terrorist attacks.

  Orders to factories for durable goods -- expensive products such as cars, refrigerators and tanks -- rose in December for the second time in three months. And inventories have fallen to the lowest level in almost two years.

  The rapid reduction in unsold goods may produce a "significant" boost to growth this year, Greenspan told Congress last week. Still, in its statement today the Fed indicated that hasn't happened so far.

  "The degree of any strength in business capital and household spending, however, is still uncertain," the Fed said.

  In a succession of speeches this month, at least 10 of Greenspan's central bank colleagues said they see tentative signs that the economy will begin growing soon.

  "We are in the stage of mixed data and I think we're building a foundation for a recovery, but I couldn't yet define it as a fait accompli," said Anthony Santomero, president of the Philadelphia Fed Bank, in an interview this month.

  Santomero, a voting member of the Fed's policy-setting Open Market Committee this year, said his expectation for the timing of the economy's recovery is about three months later than that of many private forecasters. The latest survey Blue Chip Economic Indicators survey showed most analysts see the recession ending by March.

  "Nobody should get excited about any numbers out there right now," said Dan DiMicco, chief executive of Nucor Corp in Charlotte, in an interview "They're too premature and there's still a lot of uncertainty we have to work through."

  Gross domestic product rose at a 0.2 percent annual rate in the fourth quarter, the Commerce Department reported today. That was in contrast to the 1.1 percent pace of decline expected by economists surveyed by Bloomberg News. The economy contracted at a 1.3 percent rate in the third quarter.

  Still, falling prices and a surge in auto sales that was based on zero-interest loans and other incentives mean that the economy wasn't as vigorous as the calculation suggested, analysts said.

  So-called nominal GDP, which isn't adjusted for inflation, fell at a 0.1 percent rate in the fourth quarter -- the first decline in almost 20 years. For companies, growth of nominal GDP of 2 percent or less "is a brutal operating environment that demands constant cost-cutting," said Joshua Shapiro, chief US economist at MFR Inc in New York.

  "This is not a solid platform from which to develop a strong economic recovery."

  Most important to the economic outlook is the likelihood that joblessness, which rose to a 6 1/2-year high of 5.8 percent in December, will continue to increase.
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