Tuesday, March 18, 2003

Rate cuts unlikely as war looms

But Fed will be ready to act

By Martin Crutsinger
The Associated Press

WASHINGTON - Uncertainty about the effects of war probably will keep the Federal Reserve from cutting interest rates at today's meeting. But Fed policy-makers will not hesitate to drive rates lower - even to zero - if necessary in coming weeks to protect the economy, analysts said.

Private economists said Monday that Federal Reserve Chairman Alan Greenspan and his colleagues will start cutting interest rates only if they think that an Iraq war was harming the economy or threatening to disrupt financial markets.

"If the war goes badly, the Fed is going to need all the ammunition it has," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. "I would expect the Fed to cut interest rates to zero in an extreme situation."

The Fed already has pushed the federal funds rate, the interest that banks charge on overnight loans, to a 41-year low of 1.25 percent in response to a recession and terrorist attacks in 2001.

Its last rate cut was a bigger-than-expected one-half point Nov. 6.

Sohn and other economists said the possibility of a series of rapid-fire rate cuts would come into play only if a U.S. war with Iraq should go badly or trigger new terror in the United States that undermined consumer confidence.

In a best-case scenario of a quick war, oil prices would retreat from their current highs and American businesses would unfreeze their expansion plans and boost the economy by rehiring laid-off workers and boosting investment.

Market sentiment about whether Fed policy-makers would cut rates at this week's meeting has been heavily influenced during the last two weeks by economic reports and the looming war.

A report that unemployment rose to 5.8 percent and 308,000 jobs were lost in February raised worries this month about a possible new recession and prompted a number of analysts to forecast at least a quarter-point rate reduction today.

With geopolitical events in Iraq moving rapidly as well, many analysts now believe that the Fed will not want to cut rates this week but will signal that rate cuts could start quickly if needed.

The Fed probably will send such a signal by changing the wording of its statement designed to foreshadow future rate moves from the current neutral position to one stating that economic weakness poses the greatest threat to the economy.

Such a move would make it easier for Greenspan to cut rates between meetings through the use of an emergency telephone conference, a device the Fed last used immediately after the Sept. 11 terror attacks.

Fed policy-makers do not have another rate-setting meeting scheduled until May 6.

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