Fed decides to hold rates steady

Posted 2:35PM on Wednesday 30th January 2002 ( 23 years ago )

Even though the Fed opted to hold rates steady, it left the door open to further rate reductions if necessary. "The degree of any strength in business capital and household spending, however, is still uncertain," the Fed said. Still, many economists, believing the economy is on the mend, are not forecasting additional rate reductions. Many economists expect the 11 interest-rate cuts by the Fed last year will pave the way for the economy to return to a healthy rate of growth in the second half of this year. There are already signs that the economy may be seeing better days ahead. Defying predictions of another negative quarter, the economy managed to eke out a 0.2 percent rate of growth in the final three months of last year, with most of the strength coming from brisk spending by consumers and government, the Commerce Department reported Wednesday. The small increase in the broadest measure of the economy, the gross domestic product, could mean that economists will date the end of the recession around the end of last year or the beginning of this year. Many economists had predicted that the economy, which shrank at a rate of 1.3 percent in the third quarter, would decline again at a rate of around 1 percent in the fourth quarter. President Bush called the gain a positive sign but warned that the country could not take continued growth and job creation for granted. He repeated the call made in his State of the Union message Tuesday night for Congress to quickly pass his economic stimulus plan. Manufacturing, hardest hit by the slump, could be turning a corner, recent economic reports suggest. Orders to U.S. factories for big-ticket goods rose by 2 percent in December, the government said Tuesday. The Institute for Supply Management earlier this month reported stronger manufacturing activity in December, a sign that the sector was beginning to emerge from a 17-month slump. And the psyche of consumers, the lifeblood of the economy, appears to be improving, too, after having been shaken by the terrorist attacks. The Conference Board reported Tuesday that consumer confidence rose for the second straight month in January, getting back above its pre-Sept. 11 level for the first time. In testimony to Congress last week, Greenspan delivered a more upbeat assessment of the economy, noting scattered signs of an economic revival. He did not include a warning he had made in San Francisco on Jan. 11 that the country continued to face significant economic risks, an omission that prompted many economists to move from predicting a quarter-point rate cut in January to a forecast that the Fed would leave rates alone. Once the Fed stops cutting interest rates, financial markets often begin immediately to worry about when rate increases might begin. Most economists believe that won't occur until the second half of this year, and then they are looking for perhaps two or three quarter-point increases. With the nation's unemployment rate now at 5.8 percent and expected to rise in the coming months, economists said Fed policy-makers will be keeping a close eye on the behavior of consumers, whose spending accounts for two-thirds of all economic activity.

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