No Change Seen at Fed Meeting

WASHINGTON – Soft economic data, the battered U.S. stock market and a weakening dollar should give Federal Reserve officials plenty to talk about at their two-day meeting this week but no cause for action on interest rates.

Tuesday afternoon, the central bank's policy arm, the Federal Open Market Committee, gathered to begin discussing the economy and interest rates.

Economists are united in predicting that concern about the sluggish pace of the economic recovery will restrain the Fed from lifting borrowing costs -- which currently sit at four-decade lows of 1.75 percent -- at this meeting and will likely keep policy on hold for several months.

"This is not a decision meeting and it's not even a meeting to set up for a decision at the next meeting," former Fed Governor Laurence Meyer told Reuters.

The Fed will deliver its rate announcement and a brief statement about the economy at 2:15 p.m. Wednesday.

On Tuesday, U.S. stock prices came under pressure from worries about profits. The Dow Jones industrial average fell by about 155 points, or 1.67 percent, while the tech-heavy Nasdaq composite saw a loss of more than 36 points, or about 2.49 percent. Stocks have logged virtually uninterrupted declines for five weeks straight.

"QUIET CONFIDENCE"

Along with what should prove an easy vote on interest rates, Fed officials will set the central bank's forecast for economic growth, due for release sometime in July when Fed Chairman Alan Greenspan delivers the central bank's semiannual monetary report to Congress.

The Senate Banking Committee, which will hold the first of two hearings on that report, has not yet set a date for Greenspan's appearance but it traditionally falls around the third week in July.

Meyer, who left the Fed in January, said if he were making a forecast at the central bank, he would have a "quiet confidence" that the struggling economy would get itself on a solid recovery track.

But he said he would not try to talk the economy up for the sake of boosting confidence. "It's not the Fed's job to try to use psychology to improve the economy," he said.

The economy, which seemed to have pulled out of the 2001 recession around the turn of the year, bolted ahead at a 5.6 percent annual rate in the first quarter.

But growth seems to have slackened sharply since then. Official data, such as retail sales, have been lackluster and the Fed's recent Beige Book, a collection of anecdotal information from around the country, was rather downbeat, describing growth as uneven.

The next few months' worth of data will reveal whether the recent petering off was a temporary soft patch or a sign of lingering weakness.

SELF-FULFILLING DOUBTS?

Economists saw some reasons for concern, not least of which was the faltering stock market which could put a damper on consumer and business spending -- two crucial engines of sustained growth.

The falling dollar could be a plus for the economy if it stimulates exports and boosts corporate profits. On the other hand, there are some worries that its weakness and that of the stock market could feed into each other, leading to a self-fulfilling gloom that could spread to Main Street.

The souring of the economic outlook has naturally led to shifting expectations about what the Fed will do.

Only a few months ago, analysts were bracing for a gradual series of rate increases during 2002, perhaps amounting to three-quarters to one full percentage point.

But the latest Reuters poll of 22 economists that deal directly with the Fed in money markets showed they unanimously expect no change in rates at Tuesday and Wednesday's meeting. Most firms do not see a rate increase until November and a few said borrowing costs would not go up at all this year.

There is even some talk in financial markets that the Fed could possibly ease later in the year if the economy does not begin to regain its stride.

"Fed officials must be growing a bit concerned about the state of the recovery," said Mark Zandi at Economy.com. "If we get another month or two of slumping equity prices, people might begin to anticipate another round of Fed easing."

But James Glassman, economist at J.P. Morgan in New York, said that unless the stock market sell-off turns into a much more severe rout, the Fed's best strategy for aiding the economy is to use the flexibility afforded by mild inflation to keep interest rates low.

"The Fed has got policy in a very stimulative stance," said Glassman. "The longer they choose to keep it that way, the more positive it is for the economy."