WASHINGTON, June 22: With rising fears about a stalling US economic recovery, the Federal Reserve is widely expected to keep key short-term interest rates at a 40-year low when it meets this coming week.

Although the Fed had been widely expected to tighten rates as the economy strengthened, analysts say the apparent sluggish pace of growth is likely to keep the Fed on hold — possibly through the end of the year.

With the Federal Open Market Committee meeting Tuesday and Wednesday, the federal funds rate of 1.75 per cent is the lowest since 1961, following a series of rate cuts last year to help pull the economy out of recession.

US economic output expanded at a 5.6-per cent pace in the first quarter of this year, but it was fuelled largely by a sharp reduction in inventories rather than demand for goods and services.

The growth rate is widely expected to be much lower in the current quarter, and a few economists cite fears of sliding back into contraction, or a “double-dip” recession.

Kermit Schoenholtz, an economist at Salomon Smith Barney, said he sees the Fed keeping an “accommodative” stand for the near future.

“Central bank accommodation remains the order of the day,” Schoenholtz said.

“The mix of low inflation and tighter financial conditions suggests that the path of US policy rates will remain lower than markets discount. Amid persistent uncertainty about the profile of the US recovery, the Fed probably will not hike rates in 2002.”

The recovery is not as robust as some had expected even a few months ago, in part because job growth has been stagnant and consumers have turned cautious amid concerns about business, homeland security and global tensions.

The University of Michigan consumer-sentiment index underscored those concerns, dropping sharply in mid-June to 90.8 from 96.9 in May, the biggest single-month decline since the September 11 terrorist attacks.

“Things are very soft right now,” said Christopher Low, chief economist at First Tennessee Capital Markets in New York.

“We have slightly trimmed back our (growth) outlook for the second quarter and the year and have pushed back the Fed’s first rate hike into November or December,” said John Silva, chief economist at Wachovia Securities.

Silva said the Fed is now likely to make only one quarter-point boost before the end of the year, then gradually lift the federal funds rate to rise to 3.75 percent by the end of 2003.

“We scaled back our interest rate forecast because the recovery is looking a little more fragile than it did a few weeks ago. While we still feel the chances of a double dip are slim, the second and third quarters will both likely see GDP growth slow to below a three percent annual rate.

“That pace is simply too slow to cut the unemployment rate and without a sustained drop in the jobless rate the Fed will remain on hold. In addition, inflation is virtually nonexistent.”

Even though most economic statistics confirm a solid if not spectacular growth pace, stock markets have remained depressed and that gloom appears to be spreading.

Depressed stock prices can have an impact not only on consumers, but on business investment and the overall economy

“The stock market is very important in driving business spending,” said Sung Won Sohn, chief economist at Wells Fargo Bank.

But Sohn and others see little risk of a double-dip recession, saying consumers are probably pausing and that the economy is on an upward trend, helped by last year’s tax cuts and record low interest rates.

“We think it is a lull and not a relapse by consumers,” said Jim Glassman, economist at JP Morgan Chase.

But Sohn said consumers still remain the key to maintaining the recovery.

“Consumers will have to carry us through, and if they falter, we will go into a double-dip recession,” Sohn said.—AFP