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| Federal Reserve Board Chairman Alan
Greenspan testifies on Capitol Hill Tuesday, Feb. 24, 2004,
before the Senate Banking Committee.(AP) |
The Federal Reserve is expected to raise interest rates a quarter-point
Tuesday, but with job creation at a near standstill many economists believe
the Fed will then put its credit-tightening campaign on hold until after
the November elections.
That marks a change from the previous consensus that the Fed, when it
raised rates for the first time in four years on June 30, was setting the
stage for gradual rate hikes
at every Fed meeting for the rest of the year.
The change is being prompted by last Friday's startling unemployment
report, which showed the economy managed to create just 32,000 new jobs in
July, the smallest monthly job increase this year and far below the
200,000-plus jobs that economists had been expecting. It was the most
dramatic sign yet that the economy had hit what Federal Reserve Chairman
Alan Greenspan had earlier termed a "soft patch ".
Most analysts believe the Fed will not see the weak July performance as
an indication that the economic recovery is in danger of stalling, noting
that other indicators of July activity, such as auto sales, have shown a
rebound after a disappointing June.
"I think the Fed will see this as a temporary setback that they don't
expect to last," said Sung Won Sohn, chief economist at Wells Fargo in
Minneapolis.
When the Fed nudged its
federal funds rate, the interest banks charge each other, up from a
46-year low of 1 percent to 1.25 percent, it announced that it believed
future rate increases could be made "at a pace that is likely to be
measured."
At the time the Fed took its action, the economy appeared to beracing ahead. But since then a variety of reports have
shown that the big spike in oil prices this year caused consumers to
dramatically cut back on
spending and raised questions among businesses about their hiring plans.
After Friday's unemployment report, Wall Street took a beating. The Dow Jones industrial average and other major
stock barometers fell to their
lowest levels of the year because of investor concerns that the economy's
slowdown could turn into something worse.
Many analysts said the main reason they believe the Fed will go ahead
and raise rates by a quarter-point this week is that if the Fed failed to
make the widely expected increase, investors would worry that the economy
is in even worse shape.
"A lack of an increase might suggest that Fed policy-makers are quite
concerned about the economy's progress," said Lynn Reasor, chief economist
at Banc of America Capital Management in St. Louis.
After Tuesday's expected hike, analysts said, the Fed may well decide
to take a pause, especially if the economy hasn't shown clear signs of
rebounding when the Fed next meets on Sept. 21, the last rate meeting
before the November elections.
Economist Lyle Gramley, a former Fed board member, said the central
bank will be strictly guided by the economic numbers in determining what
to do in September because the meeting will take place in the heat of a presidential campaign.
"The election puts the Fed in a difficult position. If the economic
data strengthens and they don't tighten, they would be accused of trying
to re-elect George Bush," Gramley said.
The concern among analysts is that the economy will not strengthen in
coming weeks as consumers and businesses continue to struggle with soaring
energy prices.
Economists said they will be watching closely to see if Fed
policy-makers give any hint on how they view the jump in energy prices.
Greenspan has indicated that he views the energy increases as temporary
and so far presenting little threat of adding to overall inflationary pressures, but that view could
change with the renewed upward climb of oil prices.
On the other hand, the Fed may view the rise in energy prices as a
significant restraint on economic growth, which would put a damper on
overall price pressures.
Greenspan said in his midyear report to Congress last month that should
inflation threaten to become a bigger problem than currently expected, the
Fed would not hesitate to abandon its "measured" pace and begin to move
interest rates up more aggressively.
(Agencies) | 
Updated: 2004-08-10 11:04