Monday, January 29, 2007

By Barbara Hagenbaugh and Barbara Hansen
USA Today

WASHINGTON — The Federal Reserve will wait to cut interest rates until the end of 2007, not earlier this year as was expected just a few months ago, economists say.

Economists surveyed by USA TODAY expect the unemployment rate will tick higher this year as the economy grows at a steady, but not blazing, pace. The slower growth is expected to lead to a sharper pullback in inflation than what was predicted three months ago.

The 56 economists were surveyed Jan. 18-24.

"We're going to see two distinct pieces. The first half of the year is going to be pretty blah, tepid growth," says Sean Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida. "In the second half, things will pick up a little bit."

Fed Chairman Ben Bernanke and his colleagues meet Tuesday and Wednesday to discuss interest rate policy. All of the economists expect the Fed policymakers will leave their target for short-term interest rates, which influences borrowing costs economywide, at 5.25%, the highest in six years.

The Fed has left interest rates unchanged since June after raising them 17 times over two years. Looking at the median of the answers, the economists do not expect a change in interest rates until the fourth quarter, when they expect a quarter-percentage-point cut. The median is the point at which half of the answers are higher and half are lower.

The expectation for a rate cut at year's end represents a significant change. Just three months ago, economists said they expected the Fed would cut rates in the second quarter.

But since then, data have suggested the economy is faring better than was expected given the sharp slowdown in housing. Economists are now predicting the softening in this year's job market won't be as substantial as they predicted last quarter. That suggests the Fed doesn't need to cut rates.

But opinions vary. Several economists, such as those at Merrill Lynch and U.S. Trust, expect the Fed will cut rates by at least a percentage point by the end of 2007. Others, such as those at The Conference Board and Bear Stearns, predict rates will be higher at the end of the year than they are now.

The difference of opinion stems from varied views of what the Fed needs to combat in 2007. While 52% said slower economic growth was the bigger risk facing the U.S. economy, 48% said inflation was a larger concern.

Fed officials make such an assessment when deciding interest rate policy: If inflation is the bigger risk, they are more likely to raise rates than cut them. If slower growth is the bigger risk, they are more likely to cut rates.

The sharp difference of opinion doesn't surprise Timothy Rogers. The chief economist for Briefing.com in South Natick, Mass., says there are just too many unknowns, such as the state of the labor market, business investment and housing. Although he expects the Fed to cut rates once this year in the fourth quarter, he says he can come up with very plausible reasons why a rate increase may instead be needed.

"It could go either way right now," he says. "Anyone who comes out and says he knows which way things are going is full of malarkey."

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