The Federal Reserve is all but certain to leave interest rates unchanged at 1.75% -- their lowest level in four decades -- when it announces its decision on monetary policy on Wednesday afternoon. Also a near guarantee is that the Central Bank will maintain its neutral bias, which means that it will say the risks of weakness in the economy are balanced with the risks of price inflation. What remains unclear -- or at least debated -- is how the Fed's statement will differ from its one in May. On Wall Street, opinions vary about what Chairman Alan Greenspan will say about the strength of the economic recovery, which picked up speed at the beginning of the year but has shown signs of slowing lately. Despite that, Mary Dennis, an economist at Merrill Lynch, said: "They will sound more certain that the recovery is sustainable." According to Dennis, the Fed could begin raising rates as early as September.
No Indications of Sustainable Recovery
Others have more conservative expectations. "The Fed is unlikely to be convinced the recovery is self-sustaining," said John Lonski, an economist at Moody's, who predicts no rate hike before November. While GDP rose at a 5.6% clip in the first quarter, business investment spending as a component of it fell 5.7%. To conclude a recovery is sustainable, some say, business spending must come back. "We have to see an indication -- which we have not -- that businesses are becoming more aggressive," said Lonski. Another source of underlying weakness has been the labor market. While the unemployment rate fell to 5.8% from 6% in May, the number of jobs added to the economy was much lower than expected. And consumer confidence -- an indication for spending behavior -- posted its largest monthly drop in June since the one following the Sept. 11 terrorist attacks, the Conference Board, a private research group, said on Tuesday. Still, there are indications a modest recovery is underway, particularly in the manufacturing sector. Since April, gauges of the factory activity have been consistent with expansionary levels. At its last meeting, the Fed was cautious. "The degree of the strengthening in final demand over coming quarters, an essential element in sustained economic expansion, is still uncertain."
Fed Can Be Patient
In 2001, the Central Bank cut interest rates 11 times to combat a recession. In a Reuters survey of 22 primary dealers, 14 said they didn't expect the Fed to hike rates until November. Most economists agree there is limited concern about inflation, leaving the Fed the ability to be patient. Meantime, economists debate where the Fed will take its remarks on Wednesday afternoon. "Since March, each Fed statement has been more positive than the one before it, as the economy looks like it is gaining a little more traction," said Diane Swonk, an economist at Bank One. According to Swonk, final demand looks like it is stabilizing, while orders and shipments data are showing positive signs. But Mike Moran, an economist at Daiwa Securities, takes a different view. "They will likely be more cautious in their outlook and recognize the pace of recovery is not as strong as it was in the early months this year."