Fed Poised To Move On Rates

The Federal Reserve's Open Market Committee meets Tuesday to consider the delicate task of raising interest rates just as an economic recovery gets rolling, and as an election draws near.

A decision is expected Wednesday.

The committee, led by chairman Alan Greenspan, sees signs of strong growth, solid corporate profits, job gains and rising inflation. It signaled in its May meeting that the days of a historic low federal funds rate have ended, saying that, "policy accommodation can be removed at a pace that is likely to be measured."

But despite the 1.2 million jobs that the economy has added since December, the U.S. workforce still has 1.2 million fewer jobs that it did when President Bush took office. Higher interest rates may tamp down inflation, but they can also restrain growth.

Further constraining the Fed's decision is the fact that central bankers tend to avoid making dramatic moves in an election year.

And for Greenspan and Mr. Bush, there is some history: The president's father and other Republicans blamed the Fed chairman for not moving fast enough to head off the 1990-1991 recession, costing the first President Bush the White House.

"I think that if the interest rates had been lowered more dramatically that I would have been re-elected president because the recovery that we were in would have been more visible," the elder Mr. Bush said to David Frost in 1992. "I reappointed him, and he disappointed me."

Earlier this month the Senate approved the current President Bush's nomination of Greenspan, 78, to serve a fifth term as Fed chairman.

Greenspan's re-nomination was no surprise. Besides earning almost universal praise for handling the economy during the 1990s, Greenspan has endeared himself to the current president.

Until recently, the longtime fiscal conservative Greenspan showed little concern over the Bush tax cuts that swelled the federal deficit. And he has signaled no worry over the growing U.S. trade deficit, which gives foreign investors a significant potential to influence the domestic economy.

But now Greenspan and Co. may begin to rollback the interest rate cuts that helped fuel the recent job boom that has Mr. Bush on firmer economic ground as the election approaches. This week may mark the end, says the Financial Markets Center think tank, of "the great easing."

With the recovery firmly rooted and jobs picking up, economists widely expect the Fed on Wednesday to boost short-term interest rates for the first time in four years. Most are forecasting a one-quarter percentage point increase in a key interest rate, which now sits at a 46-year low of 1 percent.

Greenspan and his colleagues are still of the view that inflation will be moderate in the months ahead, which would mean that the Fed can gradually raise rates. However, if inflation looks to be worse than forecast, then the Fed will take more aggressive action, Greenspan has said.

The economy grew at a 3.9 percent annual rate in the first quarter of this year, a slowdown from the previous quarter, but still a respectable pace.

Economic growth in the April-to-June quarter ranged from a rate of 2.5 percent to just more than 4.5 percent, according to analysts' projections. Growth would be stronger, analysts say, if not for the expectation that higher energy prices have put a crimp into consumer and business spending.

All the same, consumers — whose behavior plays a key role in the economy — boosted their spending in May by the largest amount in more than two years.

The Commerce Department reported Monday that consumer spending rose by a sizable 1 percent, a considerable pickup from the 0.2 percent increase registered in April. The increase in May was the largest since October 2001, when spending rebounded with gusto after being depressed by the Sept. 11 terror attacks.

"With the job outlook improving and income growing solidly, people are spending money like crazy," said economist Joel Naroff, president of Naroff Economic Advisors.

Americans' overall incomes went up by a strong 0.6 percent in May for the second straight month as did disposable incomes — what's left after taxes. The income and spending figures are not adjusted for price changes.

When adjusted for inflation, however, consumer spending rose by a more modest 0.4 percent in May after being flat in April. And disposable incomes were unchanged in May, following a 0.4 percent rise. The government does not provide a similar price-adjusted figure for Americans' overall incomes, which include wages, salaries and Social Security benefit payments.

An inflation gauge tied to Monday's report showed that prices rose by 0.5 percent in May, up from a 0.2 percent increase in April. Excluding food and energy prices, however, the inflation measure rose by a more tame 0.2 percent in May for the third month in a row.