WASHINGTON - Federal Reserve officials begin a two-day meeting today to review monetary policy amid renewed speculation that the central bank will move to cut short-term interest rates shortly.
Many bond market participants say the 12-member Federal Open Market Committee may be spurred by nagging doubtss about the recovery to trim the federal funds rate to 3.50% from the current 3.75%.
Analysts say Fed officials, who are under renewed pressure from the Bush administration to spur the sluggish economy, may act any time after the June employment report due to be released on Thursday, assuming the figures point to especially weak labor markets. The consensus forecast is for a rise of roughly 100,000 in nonfarm payrolls, so a gain of under 50,000 or 75,000 jobs might prompt a response from the Fed.
But any move by the central bank in the wake of President Bush's appeal last week for an easier monetary policy could backfire in the bond market and push long-term rates higher if the Fed is perceived to be acting in response to political pressure, some analysts warn.
Federal Reserve Board Chairman Alan Greenspan also faces potential pressure from Congress, where he will soon appear to explain the central bank's conduct of monetary policy and deliver the Fed's tentative economic forecast for 1993. He is scheduled to give the Fed's semi-annual Humphrey-Hawkins testimony to the Senate Banking Committee on July 21, a committee spokesman said.
David Jones, chief economist for Aubrey G. Lanston & Co., said the chances the Fed will trim rates are "close to fifty-fifty."
Still, said Mr. Jones, "Bush might get what he wants from the Fed in terms of lower short-term rates, but he might not get his wish in terms of a stronger recovery, because if the Fed is perceived as political in response to his request to ease, then long-term rates will shyup instead of down."
Any increase in long-term rates could hurt housing and capital investment by businesses and end up retarding a rebound that is already sluggish, Mr. Jones said.
"The bottom line is that Fed officials would love to ease if they felt long-term rates would come down, but they are afraid long-term rates will go up if they ease," said Alan Lerner, chief economist for Bankers Trust Co. in New York.
Mr. Lerner said his hunch is that the Fed will cut short-term rates before Mr. Greenspan testifies, in part because the Fed chairman would have a hard time explaining a neutral monetary policy to Congress in an election year, especially with money supply below target and mixed signals on the economy.
"There's no question people feel that the economy can use a nice jolt, but the question also arises whether the Fed has the tools in its toolbox to make that happen," Mr. Lerner cautioned. "Traditionally, the Fed has been much more successful in fighting inflation than getting a weak economy going."
Doubts about the strength of the recovery surfaced again yesterday when the Commerce Department reported that new single-family home sales in May fell 5.6% to a seasonally adjusted annual rate of 501,000, the lowest level in eight months. That figure marked the fourth straight monthly decline.
The Commerce Department report also says the median sales price of a new home tumbled from $119,900 to $106,000 in May, the lowest level in nearly 10 years. The figures were disturbing because many home owners count on equity in their homes.
Last week, the Commerce Department reported that orders for durable goods dropped 2.4% in May. Analysts say U.S. exports, which have provided a lot of support for the economy, are slackening as growth in Europe and other major trading partners cools.
"There is simply no engine of expansion in the economy," said Charles Lieberman, chief economist for Chemical Securities Inc. "Not a single sector can be described as doing well. The best that can be said is that some sectors such as housing and autos are flat or improving slightly."
Last week, the Commerce Department issued a revised estimate showing that first-quarter gross domestic product rose at an annual rate of 2.7%. But consumer demand seems to have softened in the subsequent period from April to June, and much of the recent growth has come from business spending to builp up inventories.
Mr. Lieberman said all second-quarter growth can be accounted for by rising business inventories. Real final demand, which excludes change in inventories, probably contracted slightly, he said.
Complicating the situation for the Fed is an apparent division among the central bank's policymakers, analysts say. Mr. Jones said he believes Fed governors Wayne Angell, Edward Kelley, and John LaWare oppose any additional loosening of credit and argue that the central bank has done enough to prod the recovery. Fed Vice Chairman David Mullins and governors Susan Phillips and Lawrence Lindsey seem inclined to ease again.
"We've got a perfect split in the board, and Greenspan right in the middle," and a similar split seems to exist among the central bank presidents who sit on the Federal Open Market Committee, said Mr. Jones.