US Fed seen staying on sidelines at policy meeting

After last month’s dramatic half-percentage point cut in short-term US interest rates, the Federal Reserve has little choice but to sta...

After last month’s dramatic half-percentage point cut in short-term US interest rates, the Federal Reserve has little choice but to stay on the sidelines at Tuesday’s policy meeting, according to analysts.

But even though the Fed is widely expected to leave rates unchanged, Friday’s dismal jobs report and turmoil in the Bush administration’s economic team may give the central bank more to worry about in the future.

US unemployment shot up to 6.0 per cent in November, the Labor Department said, while nonfarm payrolls sank by 40,000. Soon after that report came out on Friday, Treasury Secretary Paul O’Neill and National Economic Council Chairman Lawrence Lindsey abruptly resigned, prompting a fever of speculation about their replacements and the future of White House economic policy.

Despite Friday’s drama, economists say the overall US economic picture is little changed from when the Fed acted in early November.

Job growth is stalled, but the economy is still eking outgrowth, albeit at a sluggish pace. Federal Reserve chairman Alan Greenspan, testifying before a Capitol Hill committee, called the current economic environment “a soft patch.”

In a poll by Reuters on Friday, all 20 primary dealers surveyed said they expected the Fed to leave rates unchanged not just on Tuesday, but also at its next policy meeting on January 28-29. Many believe there may be no change in rates for months to come.

At its November 6 meeting, the central bank took financial markets by surprise with a larger-than-expected half-percentage point rate cut. However, the Fed tried to temper expectations that rates would be cut further.

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“The committee believes that today’s additional monetary easing should prove helpful as the economy works its way through this current soft spot,” the Federal Open Market Committee said in its post-meeting statement. It also dropped a warning of economic weakness, calling risks to the economy “balanced” between inflation and slower growth.

Aside from the worrisome jobs data, most economic reports since the November meeting have been mildly positive. Reuters