Fed upbeat about economic rebound

Wednesday, December 10th 2003, 12:00 am
By: News On 6

WASHINGTON (AP) _ Near rock-bottom borrowing costs probably will stick around well into 2004, but Federal Reserve policy-makers may start to nudge them up in the summer as the economy continues its recovery, economists say.

In their final meeting of the year Tuesday, Fed Chairman Alan Greenspan and his colleagues offered their most upbeat assessment of the economy in recent months. Some economists viewed that as a hint the central bank's three-year period of credit easing was coming to an end.

The economy is ``expanding briskly and the labor market appears to be improving modestly,'' said Fed policy-makers as they decided to hold a key short-term interest rate at a 45-year low of 1 percent.

The Fed ``has put its seal of approval on the rebound story,'' declared Ken Mayland, president of ClearView Economics.

Economic growth galloped ahead at a 8.2 percent rate in the July-September quarter, the fastest pace in nearly two decades. Analysts predict the economy will slow but still post a healthy growth rate of around 4 percent in the current quarter.

The economy gained nearly 300,000 jobs over the last four months, following a long period of job losses.

In another encouraging note, Fed policy-makers said the dangerous prospect that inflation could move lower was less of a concern now than it has been.

``The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation,'' the Fed members said.

Although Fed policy-makers repeated a commitment to keep rates at super-low levels ``for a considerable period,'' the Fed's more upbeat comments about the economy and diminishing worries about falling inflation were viewed by economists as steps toward preparing Wall Street and Main Street for the possibility of higher rates in the future.

``We believe the Fed will probably start to nudge rates higher by the middle of next year after more evidence has been accumulated to suggest that the economy is on a solid growth track,'' said Lynn Reaser, chief economist at Banc of America Capital Management.

Reaser expects the Fed's main lever to influence economic activity, the federal funds rate, will rise from the current 1 percent to 2 percent by the end of next year. The funds rate is the interest that banks charge each other on overnight loans.

``The stage is set for dropping the 'considerable period' phrase at the (Fed) meeting on Jan. 27-28 or March 16,'' said Stuart Hoffman, chief economist at PNC Financial Services Group. ``This in turn will set the stage for a hike in the funds rate starting at the June 29-30 meeting.''

Any increase to the funds rate would mean a similar boost to commercial banks' prime lending rate, currently at 4 percent, the lowest level since 1959. The prime rate is the benchmark for many short-term consumer and business loans.

Richard Yamarone, economist with Argus Research Corp., is among the analysts who think the Fed won't start raising rates until 2005. ``You might want to settle down for a long hibernation at the Federal Reserve,'' he said.

Although the job market and business investment have improved, more progress must be made before the Fed would want to boost rates, Yamarone said. He also believes the Fed would be reluctant to raise rates in an election year.

Low borrowing costs can be a boon for borrowers but can bring meager returns for savers.

While the Fed's low interest rates have spurred consumer and business borrowing in this country, the low rates have depressed the value of the U.S. dollar compared with other currencies. In recent days, the dollar has fallen to record lows against the euro, the European currency.

Analysts said the Fed right now is probably not concerned about the dollar's fall because the decline has been orderly and a weaker dollar will make U.S. exports more competitive. As a result, it helps lower the country's soaring trade deficit.

The Fed last cut the funds rate on June 25 by one-quarter percentage point. Since then, it has opted to leave the funds rate unchanged.