Fed Expected to Leave Rates Untouched

L.A. Times Archives

Sept. 15, 2003 12 AM PT

From Times Wire Services

With the U.S. economy getting healthier, though it is not out of the woods yet, Federal Reserve officials are widely expected to leave short-term interest rates untouched this week.

“It’s going to be a fairly dull meeting,” Pete Kretzmer, senior economist with Banc of America Securities, said of the Federal Open Market Committee gathering set for Tuesday. The committee sets policy for the Fed.

Recent data show that the economy probably picked up steam from a respectable annual growth rate of 3.1% in the second quarter of the year. Consumer spending has boosted demand, and the struggling manufacturing sector, hammered by job losses in recent years, has shown signs of stabilizing.

Many economists are looking ahead to a report due today from the Federal Reserve that is expected to show that U.S. manufacturing expanded in August and early September as factories cranked up production to keep pace with rising demand.

The report is likely to show that industrial production rose 0.3% last month after a 0.5% gain, according to a Bloomberg News survey of economists.

Extra cash from tax cuts and mortgage refinancing is fueling spending at a time when inventories are lean and stores are offering discounts to attract shoppers.

The price promotions are helping keep a lid on inflation and give Fed policymakers room to keep borrowing costs at an almost 46-year low to encourage the economic expansion, economists said.

“We see the economy beginning to perk up a little bit,” said Robert Wildrick, chief executive at Jos. A. Bank Clothiers Inc.

When central bankers meet Tuesday, the Federal Open Market Committee probably will hold the benchmark overnight bank lending rate at 1%, based on the median forecast of 95 economists surveyed by Bloomberg. Some Fed officials have indicated that even as the economy shows signs of strengthening, inflation may slow further.

Costs to consumers for goods and services may have gained 0.3% in August after a 0.2% rise, according to economists. The Labor Department’s report is due Tuesday.

Excluding fuels and food, the consumer price index is expected to rise 0.2% for a second month.

As for jobs, the Labor Department is expected to report Thursday that the number of Americans filing first-time claims for unemployment benefits held above 400,000 for a third straight week. Some economists consider 400,000 the dividing point between an improving and a deteriorating labor market.

Manufacturing is strengthening as consumer demand rises. Inventories fell 0.1% in July, according to the Bloomberg survey of economists, after a 0.1% rise. The Commerce Department is to report on July business inventories today. With fewer goods on hand, companies are placing more orders with factories.

Home builders still are trying to catch up with the record pace of sales, which in July was the second-fastest ever. The average 30-year fixed mortgage rate is less than 1 percentage point above its all-time low.

Housing starts in August may have reached a 1.825-million annual rate, close to the 17-year high of 1.872 million in July, according to the economist survey. Residential construction, which accounts for 5% of the value of goods and services produced in the U.S., has been underpinning the economy’s expansion.

The pace of home sales is causing backlogs to rise among the nation’s builders. The Commerce Department’s report is slated for release Wednesday.

Tax cuts, the war in Iraq and the economy’s slow growth earlier this year are combining to widen the U.S. budget deficit, economists said. The Treasury Department is expected to report Wednesday that August spending exceeded receipts by $78 billion, higher than the shortfall in the same month last year -- $54.7 billion.

“The fiscal year deficit will slightly exceed $400 billion, or 4%” of gross domestic product, said Steve Wood, principal economist at Insight Economics in Walnut Creek, Calif.

“This will be a new dollar record but still well below 1984’s 6%” of the economy, he said. The 2003 fiscal year ends in September.

Here is a roundup of the week’s business and economic events.

Today:

Commerce Secretary Donald Evans unveils the Bush administration’s manufacturing initiative in a speech to the Detroit Economic Club.

The Commerce Department reports on business inventories for July.

The Federal Reserve reports on industrial production for August.

Tuesday:

The Federal Open Market Committee meets to set interest rates.

The Labor Department reports on the consumer price index for August.

General Mills Inc. and Kroger Co. report quarterly financial results.

Wednesday:

The Securities and Exchange Commission considers rules on mutual fund fees.