The Federal Reserve Board will have some explaining to do after its policymaking meeting today.
Analysts and investors yesterday continued to predict widely that Fed officials would lift their benchmark overnight interest rate to 1.50 percent from 1.25 percent. But a swelling minority of observers predicted that the Fed would leave the rate unchanged today because of the recent sharp fall-off in hiring and consumer spending.
Either way, in a statement issued after the meeting, Fed officials will likely indicate whether they view the recent economic slowdown as a passing hiccup or a worrisome cough. And if they leave rates unchanged, they could use the statement to explain a decision that could jolt the markets.
"At a minimum, the recent 'soft patch' is proving softer and more prolonged than anticipated," Nigel Gault, research director of Global Insight, an economic research firm, wrote in an analysis for clients, predicting that the Fed would keep the rate on hold today.
Fed Chairman Alan Greenspan said on Capitol Hill three weeks ago that the economy was going through a "soft patch" that should prove short-lived. Since then, the government has reported that job growth nearly halted in the last two months and that consumer spending plummeted in June, while oil prices have climbed to new highs.
Fed officials had said before Friday, when the July job numbers came out, that they believed the pace of economic growth was slowing to a cooler but sustainable pace. And they agreed they should continue raising their benchmark federal funds rate, which is charged on overnight loans between banks, to a level that provides less stimulus to an economy gaining strength.
They also made clear they were more worried about the inflationary risks of leaving the rate so low for too long than about the danger that raising it would hurt the economic expansion.
Fed officials decline to discuss policy publicly during the "blackout period" of about a week before their scheduled meetings, so they have issued no public hints of how they viewed the latest data. But some observers said the sour job numbers at least opened the door to the possibility of leaving the rate unchanged.
"The Fed could well decide to wait for more convincing evidence that the economy's pause is only temporary before moving interest rates higher," Lynn Reaser, chief economist of Banc of America Capital Management, wrote yesterday.
Traders in futures contracts linked to the funds rate had priced them Thursday to indicate a 98 percent likelihood of a Fed rate increase today. By yesterday's close, the likelihood had fallen to 91 percent.
After Greenspan's upbeat comments in July, many analysts concluded they would see a steady series of increases of a quarter percentage point. But Fed officials have always said the pace of increases would depend on the economy's course.
While Fed officials see high oil prices as a passing problem, they have exerted a bigger drag on business hiring and consumer spending than forecast. Meanwhile, a weak labor market exerts little upward pressure on wage inflation, in the Fed's view. Employers added just 78,000 jobs in June and 32,000 in July. Those gains were below the 108,000 monthly number that Labor Department economists view as statistically significant, meaning they are considered essentially unchanged.
Most analysts argued that the recent weak economic figures may justify some new analysis but not a shift in policy that would shake financial markets. That might inject an additional source of volatility at a time when businesses are beset with the uncertainties of oil prices and terror threats.
"The Fed's approach recently has been to shore up confidence in the face of mixed data and global uncertainty," said Nicolas Checa, managing director of Kissinger McLarty Associates, an international advisory firm, who said he expected the Fed to raise its rate today. Fed officials "certainly haven't prepared the markets for a new policy approach," he said.
Checa said he doesn't think the economic data justify a Fed policy change, yet. He said, "The data have been certainly mixed of late because we're going through an inflection point in terms of the economy and monetary policy. And it is precisely because the data have been mixed that we need a steady Fed policy."