Dec. 9 (Bloomberg) -- Federal Reserve policy makers left the benchmark U.S. interest rate at a 45-year low and said they can hold down borrowing costs for a ``considerable period'' even as the risk of slowing inflation recedes. ``The probability of an unwelcome fall in inflation has diminished and now appears roughly equal to a rise in inflation,'' the Federal Open Market Committee said in a statement. Fed Chairman Alan Greenspan and his committee colleagues voted 12-0 to leave the overnight bank lending rate at 1 percent, the lowest level since 1958. Investors had been split about whether the Fed would drop the ``considerable period'' phrase after the economy grew last quarter at the fastest rate in 19 years. By keeping the language and tweaking its stance on disinflation, the FOMC may be setting the stage for a rate increase next year, economists said.
``This is the first step to prepare the market for the coming changes in policy,'' said John M. Bartlett, director of market strategy at Commerce Trust Co., which manages $10 billion in St. Louis. ``They did a nice job in sending that subtle message, while at the same time keeping that `considerable period' phrase so as to not totally alarm the markets.'' The price of the benchmark 10-year Treasury fell. The note due in November 2013 fell about 5/8 point, pushing its yield up 8 basis points to 4.35 percent at 5:15 p.m. The Dow Jones Industrial Average fell 42 points, or 0.4 percent, to 9923.42 after earlier passing 10,000 for the first time in 18 months. The FOMC dropped an earlier phrase calling disinflation a ``predominant concern for the foreseeable future.'' Still, ``with inflation quite low and resources slack, the committee believes that policy accommodation can be maintained for a considerable period.''
Forecasts
The rate decision was expected by all 82 economists in a Bloomberg News survey. The FOMC has included the ``considerable period'' language in every statement since August, and a Bloomberg survey last week showed about half the 22 primary dealers of U.S. government debt predicted the Fed would omit the language. ``The evidence accumulated over the intermeeting period confirms that output is expanding briskly and the labor market appears to be improving modestly,'' the statement said. ``Increases in core prices are muted and expected to remain low.'' The U.S. economy expanded at an 8.2 percent annual rate in the third quarter, the fastest quarter of growth since 1984, during President Ronald Reagan's first term. Still, the core personal consumption expenditures index, the Fed's preferred inflation indicator, rose just 1.2 percent for the 12 months that ended in October.
`A Little Closer'
``They made as few changes in the statement as were necessary to keep up with what's going on in the economy,'' said Lyle E. Gramley, senior economic adviser at Schwab Capital Markets and a former Fed governor. ``This suggests the Fed probably interprets the timing of the next move to be a little bit closer now than they saw it in the previous meeting.'' While low inflation is the FOMC's goal, members have been concerned that prices might fall too far, touching off a decline in general prices, or deflation. That would push down income and earnings, meaning spending would drop as consumers and companies used more of what they earned to pay fixed debt obligations. ``We have no pricing power -- it's very hard to get a price increase to stick,'' Joseph Erba Jr., chief executive officer of North Carolina-based Brayton International, a unit of Steelcase Inc., the largest maker of office furniture. ``A lot of our suppliers are coming to us asking us to take price increases and we've had to stave them off.''
Sequence of Events
Traders have shifted expectations of how soon the Fed would raise interest rates over the past nine days. Yields on March Eurodollar futures have fallen to about 1.3 percent from 1.4 percent on Dec. 1. The level suggests traders expect the Fed to wait until the second half of 2004 to raise its target rate. Eurodollar futures are indications of three-month lending rates that have averaged 24 basis points more than the Fed's target over the past 10 years. Asked in a televised interview with Bloomberg before today's decision when he thinks the Fed might next raise its benchmark rate, former Fed Vice Chairman Alan Blinder said, ``May at the earliest, and it could well be later than that.'' Today's changes represent ``very clever wordsmithing on the part of the people at the FOMC,'' said Neal Soss, chief economist at Credit Suisse First Boston, in a television interview with Bloomberg. ``They left that language there but at the same time they changed its content.'' Sung Won Sohn, chief economist at Wells Fargo & Co. in Minneapolis, sees the Fed removing the `considerable period' language by spring, then adopting a tightening bias before it ``pulls the trigger'' on a rate increase in late 2004 or in 2005.
Growth and Jobs
Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania, predicts ``two more meetings of such subtle changes'' before the Fed raises its rate as the economy expands. The economy may grow 4.4 percent in 2004, up from 3.1 percent this year, based on median forecasts in the latest Bloomberg survey. Growth of 4 percent next year is ``very achievable,'' Gregory Mankiw, the chairman of President George W. Bush's Council of Economic Advisers, said in a televised interview with Bloomberg. Bush won tax cuts from Congress earlier this year to spur job growth. More than 2.6 million manufacturing jobs have been lost since Bush took office in January 2001. The November employment report showed that the economy created 57,000 jobs, below the 150,000 which economists had forecast. The report contained some positive signs: average weekly hours worked rose to 33.9 from 33.8, and temporary hires, which can be an indicator of permanent hiring trends, totaled 21,000, up from 15,000 the previous month.
Unemployment Rate
Fed officials have said the jobless rate, which fell to 5.9 percent in November after spending seven months at 6 percent or higher, is above the level they consider full employment that might start to boost inflation. ``Rates probably have to go up from where they are,'' said James Madden, CEO of Irvine, California-based Exult Inc., which manages human resources departments for Bank of Montreal, Circuit City Stores Inc. and other companies, in an interview. ``I'm torn. You don't want to be too late and start seeing signs of inflation, and you don't want to be too early with too much where you clamp down on growth.'' Productivity growth and business caution are still suppressing job creation, economists said. Output per hour of work, or productivity, averaged 5.6 percent annualized growth over the past eight quarters, more than double the 2.5 annual average rate of 1996-2000.
Manufacturers are driving most of the productivity gains, and factories continue to whittle away jobs even as they become busier. Factory jobs fell for the 40th consecutive month in November.
Productivity Gains
``Excess capacity and intense competition and lower prices of imports have meant that companies have had to cost cut their way back to profitability,'' Allan Gilmour, vice chairman of Ford Motor Co., told the Detroit Economic Club yesterday. ``As a result, manufacturing jobs are still down by more than three million since the end of the 1990s.'' Fed officials continue to address the gap between available resources and the use rates of labor, factories and services. ``Although the economy now appears to have turned the corner, much additional progress needs to be made before our country's labor and capital resources are fully utilized,'' Federal Reserve Board Vice Chairman Roger Ferguson said Nov. 21. The Fed last reduced the federal funds rate on June 25, the 13th rate cut since January 2001, when the central bank began its cycle of lower rates to try and head off a collapse in business spending that led to a recession between March and November that year.
Also today, the Fed left the primary credit discount rate on loans to banks from the Fed system unchanged at 2 percent. In recent years, the central bank has kept the discount rate within a half point of the overnight bank rate. On January 9, the Fed changed the cost of discount window loans. So-called primary credit, the loan rate for healthy banks, is now set at 1 percentage point above the fed funds rate, and secondary credit, a rate for distressed banks, trades at 1.5 percentage points over the overnight rate.//www.bloomberg.com