Fed Expected to Leave Rates Unchanged

After last month’s dramatic half-percentage-point cut in short-term interest rates, the Federal Reserve Board has little choice but to stay on the sidelines at Tuesday’s policy meeting, according to analysts.

But even though the Fed is widely expected to leave rates unchanged, Friday’s dismal jobs report and turmoil in the Bush administration’s economic team may give the central bank more to worry about in the future.

U.S. unemployment shot up to 6% in November, the Labor Department said, and nonfarm payrolls sank by 40,000.

Soon after that report was released Friday, Treasury Secretary Paul H. O’Neill and National Economic Council Chairman Lawrence B. Lindsey abruptly resigned, prompting a fever of speculation about their replacements and the future of White House economic policy.

Despite Friday’s drama, economists say the overall U.S. economic picture is little changed from when the Fed acted in early November.

Job growth is stalled, but the economy still is eking out growth, albeit at a sluggish pace. Federal Reserve Chairman Alan Greenspan, testifying before a Capitol Hill committee, called the current economic environment “a soft patch.”

In a poll Friday, economists said they expected the Fed to leave rates unchanged not just Tuesday but also at its next policy meeting Jan. 28 and 29.

Many believe there may be no change in rates for months to come.

At its Nov. 6 meeting, the central bank took financial markets by surprise with a larger-than-expected half-percentage-point rate cut. However, the Fed tried to temper expectations that rates would be cut further.

Robert Dederick, economic consultant with Northern Trust Co. in Chicago, said the Fed was biding its time to see how the economy would react to its latest round of rate cuts.

Dederick said the Fed will want to see how the crucial holiday shopping season plays out. With war against Iraq a possibility and the job market still in the doldrums, many experts are concerned that holiday sales will be slow.

The Fed also will be watching to see if businesses begin investing again in new plants and equipment.