WASHINGTON -- Wall Street is celebrating the first five-digit close of the Dow Jones average with exuberant confidence that the Federal Reserve will resist, for now, the temptation to ruin the party.
The Fed's policymaking panel -- the Federal Open Market Committee -- was convening Tuesday for the second time this year, and economists were virtually unanimous in their expectation that it would vote to leave interest rates unchanged.Because U.S. economic growth continues to withstand the global economic slump, the central bank need not engineer a rate cut to stave off recession. And with consumer prices advancing at a benign 1.6 percent annual rate in January and February, a rate increase to dampen demand isn't needed, either.
"As long as the economy is growing at a fast rate, without inflation, there is no reason to apply the brakes or hit the gas," said economist Norman Robertson of Smithfield Trust Co. in Pittsburgh. "For now, the Fed is in the pleasant position of having to do nothing."
The Fed has done just that since last Nov. 17, the day it cut its benchmark rate on overnight loans between banks for the third time in seven weeks. Those moves, which reduced the federal funds rate from 5.5 percent to 4.75 percent, were taken after Russia's economic crisis sent Wall Street reeling and threatened to induce a U.S. credit crunch.
But the worst fears about the impact of foreign turmoil never materialized. Economists believe the economy expanded at better than a 3 percent annual rate during the first three months of this year, not much worse than the 4 percent rate that prevailed, on average, through the previous two years.
And the stock market has more than recovered. The Dow Jones Industrial Average soared 185 points to 10,007 on Monday -- 33 percent higher than its 7,539 close on Aug. 31 in the midst of the Russian financial scare.
The questions are, "How much longer can the Fed remain on hold?" and, when it does move, "Which way will it go?"
Robertson said a long-awaited economic slowdown should arrive during the second half of this year and that might induce the Fed to trim rates again, sometime next year.
Recessions abroad continue to depress U.S. export sales, business investment spending is slackening and housing construction decelerating from record levels, he said, leaving consumer spending as the principal engine of economic growth.
However, many other economists see signs of an Asian recovery. And as demand there perks up, one of the principal brakes on commodity price inflation will lessen.
"At that point, there's a greater probability of tightening rather than easing," said economist Mark Zandi of Regional Financial Associates in West Chester, Pa.