Mon, Aug 09, 2004 page12

• Rate increase expected despite job data

  MONETARY POLICY Some analysts predict a quarter-point rise in US interest rates this week, despite the unexpected weaknesses shown in labor market reports last month

  • AFP
  • • 
    • 
    • 

  US Federal Reserve policymakers, resolute despite staggeringly weak jobs growth in July, appear determined to tighten key short-term interest rates this week.

  Extended labor market weakness, however, could curb the bank's ambitions for "measured" rate rises through the rest of the year, analysts said.

  Federal Reserve chairman Alan Greenspan and his colleagues were broadly expected to tighten the federal funds target rate, which banks charge each other overnight, to 1.5 percent from 1.25.

  The decision, expected to be a pre-emptive shot at inflation, will be announced at about 2:15pm tomorrow.

  US employers hired a meager 32,000 extra workers in July, government figures showed Friday, shattering hopes of a labor market rebound after a sluggish June.

  Private economists had predicted a gain of about 240,000 jobs.

  The job shock clouded the outlook for interest rates, curbing expectations of quarter-point increases at each of the four central bank meetings remaining this year.

  But rates still seemed sure to go up this week.

  "As long as you think the economy is going to rebound, and I assume that's what the Fed believes, then they will probably go ahead and raise interest rates in August," Wells Fargo Bank chief economist Sung Won Sohn said.

  "However, if the next employment report turns out to be weak, the Fed will pass in September," Sohn added.

  Adding to pressure for a rate rise, the Wall Street Journal said Greenspan could be accused of trying to help President George W. Bush in Nov. 2 elections if he leaves rates untouched.

  The big economic fear is that the US could be stuck in a rut of jobs-scarce growth, meaning that the labor market enjoyed a brief bright spot in spring, not a soft spot in summer.

  "Not too long ago, Greenspan stated that he believed that the US economy would be quick to recover from a summertime slowing of the economic activity," said Moody's Investors Service chief US economist John Lonski.

  But he still predicted a quarter-point increase in the federal funds rate this week.

  Wachovia chief economist John Silvia said the weak jobs report did not necessarily signal a weakening economy.

  "Disappointing employment gains do not signal a similar fate for growth," Silvia said. "Instead the economy may be back in the same mix we saw in 2002-2003 where real growth is being driven by productivity gains and not employment."

  If Silvia is proved right, interest rates could be tightened to limit inflationary pressures in a growing economy, even as employers shut the door again on new hires.

  "There is good news and bad news," he said.

  "If you have a job, hourly and weekly earnings are up. Bad news is that it continues to be difficult to get a job. This suggests that personal income growth for those with a job continues to improve. Therefore consumer spending among those with jobs is likely to continue at a good pace."

  Despite the soft employment data, Citigroup chief North American economist Robert DiClemente said that underlying labor market trends appeared encouraging as firms' profits improve.

  "The Fed's assessment of the fundamentals supporting the outlook for solid demand growth should not be swayed too much by [this] news," he said, predicting a quarter-point increase in the key rate tomorrow.

  More menacing to the economy, he said, was the possibility of an acceleration in the energy price climb.

  "To be sure, without some relief from rising energy costs, we would have to rethink the outlook, but with market interest rates plunging today, chances of runaway pessimism overtaking recovery appear limited," he said.

  Comments will be moderated. Keep comments relevant to the article. Remarks containing abusive and obscene language, personal attacks of any kind or promotion will be removed and the user banned. Final decision will be at the discretion of the Taipei Times.
• Most Popular

  • 1

    German warships to pass through Strait

  • 2

    Sino-Russian air patrol designed to counter US

  • 3

    Court orders Ko Wen-je’s detention

  • 4

    Ko Wen-je release quashed

  • 5

    Travel warning issued over CCP Xinjiang efforts