- The Washington Times - Sunday, October 26, 2003

The U.S. economy finally appears to be perking up. Growth over the summer sizzled, and even the downtrodden labor market is showing signs of life.

Just don’t tell Federal Reserve Chairman Alan Green-span and his colleagues, who meet tomorrow to decide whether to change interest rates.

The central bank is widely expected to turn a blind eye to all the good news. Policy-makers do not want to spook jittery bond investors into thinking the faster growth will lead the Fed to start raising interest rates.

Economists predict no change in the benchmark federal funds rate, now at 1 percent, a 45-year low. They also expect Fed officials to indicate it will be some time before they begin to consider raising rates.

“Clearly, the Fed is not going to be talking about hiking interest rates anytime soon,” said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. “The Fed doesn’t want to do anything dramatic that would shock the markets.”

Stronger economic growth normally would cause the Fed to think about nudging rates higher to make sure that increased demand for goods and services did not cause inflation to rise.

Many economists believe the economy raced ahead at an annual rate of 6 percent or better in the July-to-September quarter. If confirmed when the government releases the data on Thursday, that would be the fastest growth in the gross domestic product since late 1999.

Another sign of strength is the Fed’s latest survey of business conditions. It found that virtually every region of the country was enjoying stronger growth.

Even the job market is on the upswing. Businesses added 57,000 workers to their payrolls last month after seven straight months of job cuts.

However, since early 2001, 2.7 million have lost their jobs during the recession and weak recovery. The September gain was far below the 100,000-plus monthly increases the economy showed during the 1991-2001 economic expansion.

Job growth will have to pick up significantly to make a dent in the unemployment rate. It is at 6.1 percent, down from a high this summer of 6.4 percent.

Because of the fragile job market, analysts say, the Fed will be cautious about raising interest rates, more so because inflation seems to be under control.

“The Fed is looking for two things: jobs and inflation. And we aren’t seeing much of either right now,” said David Wyss, chief economist at Standard & Poor’s in New York.

The Fed last changed rates at its June 25 meeting. The one-quarter of a percentage point move dropped the federal funds rate to its lowest level since 1958. Banks, in turn, lowered their prime lending rate to 4 percent, a level unseen since 1959 for this benchmark for millions of consumer and business loans.

Short-term rates controlled by the Fed have remained low, but longer-term rates set by financial markets have swung back and forth.

In mid-June, 30-year mortgage rates dipped to a four-decade low of 5.21 percent, then reached 6.44 percent in early September before retreating to 6.05 percent last week, the mortgage company Freddie Mac reported.

These swings of market-determined rates are very much on the minds of Fed officials. They do not want their efforts to keep short-term rates low to be undermined by rising long-term rates that could cut short the economic recovery.

For that reason, analysts believe the Fed is likely to repeat in its statement, issued at the end of tomorrow’s meeting, that it believes its low rates “can be maintained for a considerable period of time.”

Many analysts think the Fed may remain on hold for most of next year. Some believe the first increases will not occur until after next November, given the Fed’s preference to stay on the sidelines during presidential election years.

“Given how low inflation is, the Fed has some elbow room to see it go up a bit before they have to be worried,” said Diane Swonk, chief economist at Bank One in Chicago.

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