Fed Leaves Rates but Signals Cuts if Economy Worsens

Federal Reserve policymakers voted Tuesday to leave their signal-sending interest rate at a four-decade low of 1.25%, saying that -- with war looming -- they can’t figure out which way the economy is headed.

The decision by Fed Chairman Alan Greenspan and his colleagues on the Federal Open Market Committee had been expected. Analysts said that with an invasion of Iraq possibly one day away, the central bank wanted to keep its options open.

The Fed officials’ admission that they are unsure whether the economy is expanding or contracting, and why, provoked wry reactions.

“I guess if the Fed can’t figure it out, there’s no reason why we should,” said David Rosenberg, chief North American economist for Merrill Lynch in New York.

The lesson of the central bank action, said Pennsylvania economic consultant Joel L. Naroff, is: “When in doubt, punt.”

Officials could cut interest rates before their next scheduled meeting May 6 if war or a terror attack disrupts the financial system or if the economy weakens. Indeed, some analysts interpreted the central bankers’ promise Tuesday to engage in “heightened surveillance” of the economy as setting the stage for such a cut.

In the meantime, Greenspan and a majority on the 12-member committee appear inclined to the view that the economy is going through a transitory “soft patch” because of uncertainties and higher energy prices resulting from the impending war. They apparently hope that once these doubts are removed by a military victory, the country would snap out of its economic doldrums.

In this, the central bankers differ from many private analysts, who have concluded that the economy is still suffering from the effects of the stock market and tech busts and won’t recover quickly even with a speedy win in Iraq.

The economy grew at an uninspired 1.4% annual rate during the final three months of last year. Many forecasters say it’s unlikely to do much better in the first three months of this year.

Analysts were unsettled by the unexpected loss of 308,000 jobs in February. They also have been disturbed by weak home, auto and retail sales figures indicating that consumers, whose purchases have almost single-handedly kept the economy afloat for more than two years, may finally be running out of steam.

“This economy has problems that go beyond war,” said John G. Lonski, chief economist with Moody’s Investors Service in New York. “I don’t know whether another rate cut is going to make much difference.”

U.S. stocks rose again Tuesday -- but largely on hopes of a short, decisive war and on a dramatic fall in oil prices, rather than because of the Fed’s decision.

Crude oil experienced its biggest decline in 16 months; oil for April delivery fell $3.26, or 9.3%, to $31.67 a barrel on the New York Mercantile Exchange.

The Standard & Poor’s 500 index climbed 3.66 points, or 0.4%, to close at 866.45. The Dow Jones industrial average was up 52.31, or 0.6%, to 8,194.23.

Both indexes were up for a fifth day, making this their longest winning streak in almost two years. The Nasdaq composite index rose 8.28, or 0.6%, to 1,400.55.

Treasury securities extended their losses after the Fed decision Tuesday. The 3 7/8 2013 note fell about 1/2 point, pushing up its yield, or market interest rate, 7 basis points to 3.89%, its highest in a month.

Commentators noted that the Fed was in a particularly serious bind in deciding whether to say anything about the economy Tuesday.

President Bush announced only Monday that Iraqi President Saddam Hussein must flee in order to avert a U.S.-led invasion. The president’s deadline passes later today.

“It was really deference to the fog of war,” Lonski said of the central bank decision to avoid comment on the economy’s condition.

“The committee does not believe it can usefully characterize the current balance of risks with respect to the prospects” for growth and price stability, the central bankers said in their statement. “Rather, the committee has decided to refrain from making that determination until some of those uncertainties abate.”

It was the first time that the Fed has declined to say what it thought the main risks were to the economy since the central bank began announcing its economic views at the beginning of 2000.