S. Balakrishnan

AS usual, the market is riveted on the Federal Open Markets Committee (FOMC) meeting which by the time this prints would have ended in an interest rate announcement and the usual post-meeting statement.

That the FOMC will hold rates is a no-brainer. In fact, events of the last few days - the Madrid bombing and the none-too-strong string of economic data - only buttress the case for the continuance of the Fed's soft monetary and interest rate stance. After all, the prolonged low interest rate environment has not led to any great change in the performance of the real economy, suggesting that there is a long way to go before a tighter monetary policy becomes necessary. On the contrary, confidence, especially of business, in terms of hiring, still lacks oomph.

Another worry is the steady, and in the last few days, sharp, slide of the stock market. The Dow is perilously close to breaking through 10,000 while the Nasdaq has already cracked 2,000. The market has factored in the growth in corporate profits in its rapid rise in the course of 2003. Now it is time for profit-taking and consolidation, particularly as nothing spectacular is taking place on the economic and business fronts to drive markets higher.

It is in this background that the current FOMC meeting is taking place. The atmosphere will undoubtedly be sombre, given that the much-awaited momentum in job creation is still elusive. The hope is that as the economy revs up, businesses will turn their focus from cost-cutting and productivity improvement to increasing production and hiring.

Mr Alan Greenspan, the Chairman of the Federal Reserve, is optimistic that the economy will start to add jobs soon. His colleagues on the FOMC share his views. Mr Greenspan has gone further and said that the current policy stance is not normal and at some (undefined) point of time in future rates must move up. Clearly, however, that moment has not arrived yet.

Some economists think that the cash flow now coming in from tax cuts will keep up the consumer-spending component of the US economy, which is two-thirds of GDP. Against this is growing uncertainty about jobs, reflected in falling consumer confidence indices.

Once the smoke from the terrorist attacks clears up and a degree of comfort returns, things should look up. In the meanwhile, the Fed will probably deliver a morale-boosting statement at the end of its meeting.

It is likely to make an upbeat assessment of the economy and jobs, going forward, while reiterating its commitment to low rates till a firm downward in the unemployment rate is visible.

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