Doubts over economic recovery prompt Fed to keep rates on hold

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The Independent Online

The Federal Reserve yesterday left key US interest rates unchanged, as doubts persisted about the strength of the current recovery, and a surge in productivity kept inflation worries at bay.

In its statement accompanying the widely expected decision, the Fed said that the economy was experiencing "considerable" upward movement, but that "the degree of strength of final demand" was still uncertain". The risk for the future remained "balanced" between inflation and recession the central bank said –indicating its keenly monitored "bias" was also unchanged.

The meeting came amid gathering evidence that first-quarter 2002 growth, reported at a preliminary 5.8 per cent last month, is overstating the strength of the upturn. Economists reckon the real underlying GDP growth rate is about 3 to 3.5 per cent. Unemployment in April, at 6.5 per cent, was a seven-year high.

Dim corporate earnings expectations are also keeping the stock market flat, while the dollar is also weakening, amid international doubts over the longer term resilience of the economy.

Yesterday's decision means the earliest possible date for a rate increase – reversing 11 consecutive cuts in the fed funds rate to the current 40-year low of 1.75 per cent – is the Federal Open Market Committee's next meeting on 25 and 26 June. Most analysts, however, expect the Fed to wait until August, or later.

Another factor weighing on the central bank was the huge jump in productivity announced by the Labor Department yesterday, showing output per worker rose 8.6 per cent in the first quarter, the fastest rate in almost 19 years as employers squeezed more out their existing workforces rather than hiring new workers.

Coupled with a year-on-year drop in non-farm wages of 6.5 per cent in the same period, the data suggests inflation will not be a major worry any time soon.

But the softness in wages also make it less likely that consumer demand – whose unexpected strength kept the recent downtown so shallow – will rise significantly in coming months.

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