WASHINGTON, Sept. 15 (UPI) -- Federal Reserve policymakers will be gathering Tuesday to vote on whether to cut interest rates or not, but few analysts expect the key rate to be cut yet again. For while prospects for the job market remains undeniably weak, some economists argue that economic fundamentals are looking slightly better, while the Bush administration continues to insist that the road to domestic economic recovery is well under way.
"Fed to worry, but not act." Or so summed up the research team at brokerage house UBS in its latest economic outlook report.
The Federal Open Market Committee meets for the sixth time this year on Tuesday to debate whether the key federal funds target rate, but the odds of a rate cut from the current 1.0 percent seems highly unlikely. The Fed last reduced rates by 25 basis points on June 25, citing continued risks of economic weakness. And while weakness in the economy continues to be one of the biggest issues facing President George W. Bush as he prepares to tackle next year's elections, many on Wall Street appear to be less anxious about the future than they had been three months ago.
"With capital gains tax rates lower than at anytime since 1941, dividend tax rates 60 percent lower and marginal income tax rates lower across the board, the real strength in economic activity is coming from an increased desire to invest and save. This is not a temporary event. The recovery is robust, and sustainable," stated Brian Wesbury, chief economist at investors Griffin, Kubik, Stephens & Thompson.
Indeed, for all the concerns about the unemployment rate still remaining above 6 percent and fewer jobs being created, the stock market has held up remarkably steady, keeping a solid bottom above the psychologically critical 9,000-mark.
"We believe U.S. monetary policy will continue stimulating financial market conditions, consistent with our better expectations for real GDP growth. To be sure, the residential real estate boom associated with earlier Fed interest rate easing is losing some of its earlier vigor. However, in its place are heightened stock market wealth effects and an improving business appetite for borrowing and purchasing capital goods," added UBS chief economist Maury Harris.
Joel Naroff, president and chief economist of Naroff Economic Advisors, echoed that sentiment.
"There are clear indications that the outlook is markedly better than when the Fed met in August. Second quarter GDP was revised to up 3.1 percent from the original 2.4 percent pace, growth this quarter could approach or exceed 5.0 percent and the outlook for the rest of the year and into 2004 is good. Though I never doubt the ability of the members to rationalize almost any stance, it would be hard to continue arguing that "the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal." As for the deflation-inflation risk, that should be more neutral. However, changing the balance of risks toward stronger growth and neutral inflation might be viewed as sending a message that the FOMC is prepared to start raising rates, which I doubt they are. Thus, while no change in rates is expected, the change in the evaluation of risks to where they appear to be is less certain."
That may well be the broad consensus amongst institutional investors, but for the average taxpayer, there are still grave concerns beyond simply job security that continue to rattle those on Main Street. For one, the ballooning budget deficit, coupled with the fact that the war in Iraq continues to weigh heavily against any surge in consumer sentiment.
In fact, the University of Michigan's consumer sentiment index for September released last week found that the reading fell to 88.2 from 89.3 in August. Meanwhile, the fact that the Bush administration is asking for a far greater financial contribution for the war in Iraq, to the tune of $87 billion, has made many voters less willing and indeed more nervous about supporting efforts to reconstruct the war-torn country.
As for prospects of a demand-led recovery, there is some doubt as to how strong that can be, given that the Fed reported Monday August's industrial production rising only 0.1 percent, while manufacturing dipped 0.1 percent.
Meanwhile, it is doubtful whether a quarter-percentage-point interest rate cut could actually do much to stimulate growth, even if the Fed did decide to ease monetary policy once again. After all, it may be better to save that option for a time when it is more likely to be needed, especially as interest rates already have little wiggle room for further rate cuts.
