Fed holds fire on rates, pledges surveillance

  • Business
  • Thursday, 20 Mar 2003

WASHINGTON: US Federal Reserve policy-makers have held interest rates at 1961 lows, contending that uncertainties caused by the pending war in Iraq are so extreme they could not gauge the American economy’s prospects. 

In a new and unusual turn of phrase that left markets puzzled, the Fed policy-makers also pledged “heightened surveillance”, implying they were ready to lower rates if necessary. They next meet on May 6 but could act earlier if the war goes badly for the United States or the economy unravels. 

The Federal Open Market Committee’s (FMOC) 12-0 decision on Tuesday left the central bank’s trend-setting federal funds rate target for overnight loans between banks at 1.25%, where it has been at since a hefty cut last November. 

The Fed blamed the hesitant US economic recovery on “oil price premiums and other aspects of geopolitical uncertainties”, and said it still believed low interest rates and strong productivity would help the economy eventually, echoing chairman Alan Greenspan’s publicly stated conviction. 

With a war days – or potentially even hours – away, the Fed said it “does not believe it can usefully characterise the current balance of risks” between a fresh bout of economic weakness and a pick-up in prices. 

The Fed’s decision to hold fire on rates was expected but the imprecise wording of its statement caught financial markets off-guard. Merrill Lynch chief economist David Rosenberg described the statement as “somewhat perplexing”. 

The Fed said it would withhold any determination on the threats facing the US economy until after some of the “unusually large uncertainties” had abated. 

Some analysts said the Fed’s temporary abandonment of the balance of risks assessment made sense. 

“Having absolutely no idea how the war will go, they decided they were unable to determine whether there would be weakness, strength or whatever over the next couple of months,” said Joel Naroff of Naroff Economic Advisors. 

The policy-makers expressed faith in the US economy’s underlying health, despite admitting that a payrolls plunge in February was disappointing. They said that “over time” the economic climate should respond to low rates and worker output growth. 

Financial markets and analysts alike were struck by the more than usually opaque wording of the Fed’s statement. 

”The language is very tortured. It suggests to me that there was (a) split within the FOMC,” said Wayne Ayers, chief economist at FleetBoston Financial in Boston. 

The widely expected decision on rates came after President George W. Bush on Monday warned Iraqi leader Saddam Hussein and his sons that they had 48 hours to flee or fight. – Reuters  

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