The U.S. Federal Reserve on Tuesday held interest rates at 1958 lows and signaled it was in no hurry to raise borrowing costs with job creation sluggish and inflation tame. The unanimous decision by the policy-making Federal Open Market Committee keeps the trendsetting federal funds rate for overnight loans between banks at 1 percent, a level hit after a cut last June. Policy-makers sounded more cautious about prospects for strong job growth, so far a missing ingredient in the recovery from the 2001 recession, and one that is taking on a growing profile ahead of November presidential elections. "Although job losses have slowed, new hiring has lagged," the FOMC said. The U.S. central bank repeated that risks of a fall in inflation were "almost equal" to that of a climb in consumer prices and chances of a pickup in growth and a downturn were "roughly" balanced.
The FOMC also reiterated it could afford to be "patient" about raising rates, implying that policy-makers feel scant pressure to boost credit costs despite a strengthening economy because inflation remains muted and job growth is anemic.
JOBS STILL SCARCE
The FOMC statement was highly similar to one issued after their last meeting on Jan. 28, but slightly more downbeat. "The evidence accumulated over the inter-meeting period (since late January) indicates that output is continuing to expand at a solid pace," the Fed said, in contrast to the January, when they said output was growing "briskly." Analysts said the Fed was making the point that it will stay the course with easy monetary policy until a persuasive economic upturn was in place, possibly maintaining current rates through 2004. "Until and unless there are significant increases in jobs over a period, tighter monetary policy (higher rates) is out of the questions," said economist Sung Won Sohn of Wells Fargo & Co. in Minneapolis. A poll by of 20 Wall Street analysts on Tuesday found a growing certainty that any rate rises are months in the future. No respondents foresaw a rate rise at the next scheduled FOMC meeting on May 4 and 10 said they now felt no change in rates will occur before 2005.
With only 21,000 jobs created in February, far fewer than forecast and under the 100,000 or so needed just to absorb new job-seekers, the Fed has no reason to raise rates, the economists said. Bond prices strengthened on the indication rates will stay low for some time, with the 30-year U.S. Treasury bond jumping 1-1/32 points to yield 4.65 percent and the 10-year Treasury note ahead 21/32s and yielding 3.69 percent. Stocks ended higher after seesawing up and down after the Fed decision, finally settling on an optimistic assessment that credit costs will stay cheap for some time. The Dow Jones Industrial Average <.DJI> ended up 81.78 points, or 0.81 percent, at 10,184.67 while the technology-heavy Nasdaq Composite Index <.IXIC> added 3.89 points, or 0.20 percent, to end at 1,943.09. The dollar's value fell against the Japanese yen but was nearly unchanged against the euro. Higher U.S. rates would make dollar-denominated assets more attractive to foreigners but there is no sign that low rates are draining investment funds. While the economy has clearly gained strength, its failure to generate more jobs has fired a debate between President George W. Bush's Republicans and Sen. John Kerry, the certain Democratic nominee, ahead of November's presidential election.
TRADING BLAME
Some 2.2 million nonfarm jobs have been scrubbed from payrolls since Bush took office in 2001, but administration officials argue he inherited a recession and faced setbacks such as the Sept. 11, 2001, attacks and corporate scandals. Kerry has lashed back, calling corporate executives who move jobs to cheap-labor countries from the United States traitors and urging a close watch on the move of white-collar and technological work to China and India. Fed Chairman Alan Greenspan -- echoing Treasury Secretary John Snow and other Bush administration officials -- said last week the job picture should brighten "before long as output continues to expand." Greenspan has also emphasized that rates cannot stay low indefinitely, although many economists see no increase until well into this year or even next.
One factor holding hiring down has been huge growth in productivity, or output per worker, but eventually those gains will wane and force companies to take on more employees. Some economists caution that if hiring remains anemic, consumers' ability and willingness to spend -- a key force behind expansion -- could diminish///