WASHINGTON - U.S. Federal Reserve policy-makers almost certainly will keep short-term interest rates steady when they meet on Tuesday, hoping a budding pickup will flower into more vibrant second-half economic growth. The central bank's Federal Open Market Committee gathers at 9:00 a.m. EDT to consider interest-rate strategy and should announce a decision around 2:15 p.m. EDT. With glimmers of hope for a faster recovery showing through the gloom of a jobless crawl back from recession in 2001, analysts agreed the Fed has breathing room. Policymakers cut the trend-setting federal funds rate charged on overnight loans between banks 13 times since the start of 2001, most recently at the close of the last meeting on June 25, to a 45-year low of 1 percent. "I certainly am not expecting any change in rates," said economist Kurt Karl of Swiss Re in New York. "I suspect that what we'll find is that they're on hold for now and will be for the time being."
While the rate decision is in little doubt, the traditional post-meeting statement will be under the microscope. The Fed in May shifted to a more complex assessment of economic risks -- offering separate outlooks for growth and prices. In June, the FOMC called risks to expansion balanced but warned of the potential for "an unwelcome substantial fall in inflation." The Fed's "beige book" summary of national economic conditions, out July 30, reported an increase in momentum at the beginning of the second half. Even the sorely stressed manufacturing sector, hit by 2.6 million job losses since mid-2000, has been perking up. Activity "increased a notch during June and the first half of July," the Fed concluded, heartening since officials have warned frankly that brisk growth is vital to reverse a downward trend in an already slow rate of inflation. Warnings from the Fed about low inflation initially sparked a plunge in long-term interest rates. Those rates have since surged as officials, including Fed Chairman Alan Greenspan, indicated a reluctance to use unusual measures like buying bonds in the fight against low prices. "More than they expected, they got an injection of market activity from simply talking about the issue of deflation," Karl said, adding he thought the Fed would be wise to drop its reference to risks of "an unwelcome substantial fall in inflation" to fan hopes for a moderate growth pickup. "I think there's a little wind up now for growth but I think the key factor is that the wind doesn't seem quite as strong as some had expected it to be by now," Karl said.
The U.S. economy grew at an unexpectedly brisk 2.4 percent annual rate in the second quarter, up from 1.4 percent in the first quarter but still below the pace needed to create jobs. Economist Douglas Lee of the advisory firm Economics from Washington said robust figures on productivity out last week might give policy-makers cause for concern. Worker productivity, a gauge of hourly worker output, shot up in the second quarter at a 5.7 percent annual rate, nearly triple the first quarter's 2.1 percent. That showed companies able to make more for less, not promising for job creation. Lee said strong productivity growth and its implications for hiring make it more likely the Fed will retain its warning about falling prices. "It seems clear that an unwelcome fall in inflation is every bit as strong and perhaps stronger than it was in June so I think they'll keep that," he said.//