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Archive for Tuesday, December 10, 2002

Analysts expect Fed to keep interest rates steady

December 10, 2002

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— Amid a stagnant job market, stock market turbulence and a shake-up of President Bush's economic team, the Federal Reserve is expected to hold short-term interest rates at 41-year lows today at its last meeting of the year.

That's the feeling among economists who believe that although the country will not fall into a new recession, the economy probably will struggle with tepid growth this quarter and in the first quarter of 2003.

Knocked down by last year's recession, the economy has experienced an uneven recovery this year. The seesawing economic growth - a below-par 1.3 percent pace in the second quarter, rising to a brisk 4 percent rate in the third quarter - troubles the Bush administration, Fed policy-makers, Wall Street and Main Street.

"The economy is like a car trying to navigate a winter highway. It is moving but at a very sluggish pace and there have been stretches where conditions are quite slow and treacherous," said Lynn Reaser, chief economist at Banc of America Capital Management.

The manufacturing sector's comeback trail has hit a pothole. But consumers have been keeping their pocketbooks and wallets sufficiently open to prevent the recovery from fizzling. And low mortgage rates are expected to power home sales to records this year.

New claims for jobless benefits recently hit a 21-month low, suggesting layoffs are slowing. Yet the nation's unemployment rate jumped to 6 percent in November to match April's figure, which was the highest rate in eight years.

The high unemployment is fresh evidence that companies are reluctant to make big commitments in hiring and capital investment, thus restraining the recovery.

Against this backdrop, many economists believe Fed Chairman Alan Greenspan and his Federal Open Market Committee colleagues will hold a key interest rate - the federal funds rate - steady at 1.25 percent when they meet today. The funds rate is the interest that banks charge each other on overnight loans and is the Fed's main lever for influencing the economy.

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