The central bank is ready to call a cease-fire in its aggressive credit easing, private analysts said Tuesday, because of growing confidence that the first recession in a decade is coming to a close.
"It is pretty clear that the economy is coming out of the recession," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. "The issue now is how strong and healthy the recovery is going to be."
The Fed got some good news at the start of its deliberations Tuesday. Reports showed that orders to American factories for durable goods rose by 2 percent in December, while consumer confidence posted a stronger-than-expected gain in January, rising for the first time above its pre-Sept. 11 level.
Jerry Jasinowski, president of the National Association of Manufacturers, called the jump in factory orders "the first credible evidence" that the recession is ending.
Federal Reserve Chairman Alan Greenspan noted the scattered signs of recovery in congressional testimony last week. Investors saw Greenspan's comments as much more optimistic than Jan. 11 remarks in which he worried about "significant risks" still facing the economy.
The Jan. 11 Greenspan speech left financial markets convinced that the central bank would cut rates one more time as an insurance policy. Greenspan's more positive tone last Thursday, however, caused sentiment to swing into the no-change camp.
"Pretty much everyone has come around to the view that the Fed is through cutting rates," said Melanie Jani, senior economist at Salomon Smith Barney in New York.
Many analysts said the Fed will note that the balance of risks going forward remains tilted toward economic weakness, leaving the door open to further rate reductions.
However, most analysts said that if the economy does pull out of the recession sometime in the first three months of this year, which is the current expectation, the central bank will make no further rate cuts.
That would represent a marked change from last year, when the Fed cut rates 11 times. The federal funds rate, the interest that banks charge each other, dropped to a 40-year low of 1.75 percent.
Commercial banks' prime lending rate, the benchmark for millions of consumer and business loans, was reduced in lockstep with the Fed moves and now stands at 4.75 percent, a level last seen in November 1965.
The Fed's aggressive credit easing is seen as a key reason that the current recession will probably turn out to be mild. Consumer spending has held up remarkably well, especially in such interest-sensitive areas as housing and auto sales.
Many analysts think this downturn will be the mildest recession since the 1969-70 slump. The current recession began in March 2001.
On Wednesday the government will release its first look at the economy's overall performance in the fourth quarter. Many analysts are expecting a decline in the gross domestic product at an annual rate of around 1 percent, following a 1.3 percent rate of decline in the third quarter.
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.
"I think the Fed will only feel a need to tap on the brakes because I don't think the economy is going to come roaring back," Wyss said, noting that a mild downturn usually means the recovery will be mild as well because there is less ground to make up.
Overall, analysts are forecasting a fairly calm year for interest rates, including home mortgage rates.
The American Bankers Association economics advisory panel, which briefed Fed officials last week, is forecasting that 30-year mortgages, which are currently hovering just below 7 percent, will remain at that level through the middle of this year and will end the year around 7.5 percent.
http://accesswdun.com/article/2002/1/199554