Sun Aug 8, 2004
By Jonathan Nicholson
WASHINGTON (Reuters) - The Federal Reserve's job just got a bit more complicated.
With Friday's release of disappointing jobs data for July, the U.S. central bank's plan to lift the federal funds rate to a noninflationary neutral level at a measured pace may not be as simple to put in place as before, economists said.
Members of the policy-making Federal Open Market Committee meet on Tuesday. Even with Friday's news that employers added 32,000 jobs last month instead of an expected 228,000, economists still see them raising rates a quarter of a percentage point to 1.50 percent.
However, what the panel will do at its next meeting, on Sept. 21, is subject to debate.
Should more evidence of weakness arise, the Fed could well take a breather in September. According to a Reuters poll of 20 of Wall Street's primary dealers in government debt, 10 expect a rate hike in September, but six see no move.
"As long as the Federal Reserve thinks this slowdown is temporary, the FOMC will hike the interest rate by another quarter point on Aug. 10," said Sung Won Sohn, chief economist with Well Fargo Banks in a research note. "Beyond that, monetary policy will let economic data dictate policy."
The July jobs report stirred up a simmering debate in economic circles: did the U.S. economy, on a robust growth path in the early months of 2004, fall into what Federal Reserve Chairman Alan Greenspan dubbed a temporary "soft patch" in June or will the weakness prove more lasting?
LONGER 'SOFT PATCH'?
"The economy continues to move in the right direction," Treasury Secretary John Snow insisted after the jobs report, citing a fall in the unemployment rate to a more than 2-1/2 year low of 5.5 percent and the addition of 10,000 jobs in the hard-hit manufacturing sector.
Still, hiring momentum seems to have slackened sharply, from 208,000 in May, to 78,000 in June and finally 32,000 in July. The economy's growth rate eased to 3.0 percent in the second quarter from 4.5 percent in the first quarter.
Anthony Karydakis, a Chicago-based economist, said the slowdown was due to a combination of high energy prices sapping consumer buying power, a struggling stock market and the exhaustion of stimulus from income tax cuts enacted in 2003.
Oil prices hit fresh record highs on Friday, climbing close to $45 after a renewed threat to Russian oil major YUKOS added to supply worries.
Crude prices have surged more than 30 percent this year as rapid demand growth, especially in the United States and China, leaves little leeway for any supply disruptions. Consumption is accelerating at the fastest pace in more than 20 years.
AUGUST STILL A LOCK
Few economists doubted the outcome of Tuesday's meeting.
Karydakis said the Fed has spent too many years convincing financial markets not to pay too much attention to any one indicator to risk that credibility by suspending the rate-raising campaign Tuesday.
"They can't put a freeze on that process because they got one lousy number," he said.
Bob Dederick, principal of RGD Economics in Chicago, said a pause would be seen as an admission the Fed was wrong in its assessment earlier this year that inflation was building.
Instead, he said, the Fed and financial markets will raise rates on Tuesday and then watch the stream of incoming data intently in coming months before deciding what to do next.
"That's all right," he said. "It gives us something to do."
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