In US, Federal Reserve keeps interest rates unchanged

The Federal Reserve kept interest rates unchanged on Wednesday for a third consecutive meeting, hoping that a slowing economy will dampen a worrisome rise in inflation.

October 26, 2006 07:48
3 minute read.


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The Federal Reserve kept interest rates unchanged on Wednesday for a third consecutive meeting, hoping that a slowing economy will dampen a worrisome rise in inflation.

The Fed left its federal funds rate at 5.25 percent. It has been at that level since late June when the central bank raised rates for a 17th consecutive time in a two-year effort to combat rising inflation.

The decision to keep the funds rate unchanged means that the prime lending rate, the benchmark for millions of consumer and business loans, will remain at 8.25 percent.

Wall Street got only a momentary boost from the announcement. The Dow Jones industrial average, which has been setting a string of records in recent weeks, briefly rose into positive territory for the day only to slip back.

Financial markets had widely expected no change in rates with investors believing that the central bank would want to avoid jolting markets just two weeks before the November congressional elections.

Analysts said there was nothing in the Fed's explanation of its decision to shake their view that the central bank will remain on hold for perhaps as long as a year.

"There isn't anybody on the Fed considering lowering rates and the Fed knows if you were to raise rates now you could turn what is a reasonably orderly decline in housing into a rout and threaten pushing the economy over into a recession," said Lyle Gramley, a former Fed board member.

Fed Chairman Ben Bernanke and his colleagues paused for the first time in August as signs began to mount that the rise in interest rates was causing a significant decline in the once-booming housing market and also slowing consumer spending.

The Fed has now extended that pause for three straight meetings. Many economists believe Bernanke and his colleagues will leave rates unchanged for perhaps as long as a year as they watch to see whether the economy follows the Fed's hoped-for scenario of slowing enough to cause inflation to retreat from current levels.

The decision by the Federal Open Market Committee, composed of Fed board members and Fed regional bank presidents, was supported by a 10-1 vote.

Jeffrey Lacker, president of the Richmond Fed, dissented for the third consecutive time, arguing for another quarter-point rate hike to fight inflation.

The statement explaining Wednesday's action was little changed from the comments the Fed made at the August and September meetings.

The Fed repeated worries about inflation, saying that readings on core inflation, which excludes energy and food, "have been elevated" and also saying that "the committee judges that some inflation risks remain."

Those phrases are seen as signaling that unless inflation moderates further, the Fed is prepared to boost rates again.

The government reported last week that core inflation rose by 2.9 percent in September from year-ago levels. That is far above the Fed's comfort zone of 1 percent to 2 percent price increases.

But the Fed statement also said that "inflation pressures seem likely to moderate over time" reflecting falling energy prices and the cumulative effects of the Fed's previous rate hikes.

Economic growth slowed to an annual rate of just 2.6 percent in the spring, down from a 5.6 percent rate in the first quarter, as consumers were battered by higher interest rates, surging energy prices and a cooling housing market.

Analysts believe growth slowed even further to around 2 percent or less in the just-completed July-September quarter.

Up until recent weeks, financial markets had grown hopeful that the Fed might begin cutting interest rates by the end of this year in an effort to make sure the slowdown did not deepen into an outright recession.

However, the recent drop in gasoline prices has relieved fears of a recession. In addition, Bernanke and various other Fed officials have signaled in recent comments that they were still concerned about inflation.

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