Fed holds interest rate at 45-year low

WASHINGTON – The Federal Reserve held a main short-term interest rate at a 45-year low Tuesday, an effort to keep the economic resurgence moving forward.

Fed Chairman Alan Greenspan and his Federal Open Market Committee colleagues – the group that sets interest rate policy in the United States – kept the federal funds rate at 1 percent. The funds rate, the interest that banks charge each other on overnight loans, is the Fed’s primary tool for influencing the economy.

Fed policy-makers believed currently low short-term rates “can be maintained for a considerable period.”

The decision was unanimous.

In a more upbeat note from the last Fed meeting in September, Fed policy-makers said “the labor market appears to be stabilizing.” That contrasted with a weakening labor market mentioned in September.

Holding the funds rate steady means that commercial banks’ prime lending rate for many short-term consumer and business loans will remain at 4 percent, the lowest level since 1959. Any changes to the funds rate affects the prime lending rate.

Maintaining a climate of near rock-bottom short-term borrowing costs may give consumers and businesses an incentive to spend and invest more and thus boost economic growth.

The Fed last cut the funds rate on June 25 by one-quarter percentage point. That marked the 13th reduction since January 2001, when the central bank’s credit-easing campaign began. In its meetings since then, the Fed has left the funds rate unchanged.

Super-low short-term interest rates, along with President Bush’s third round of tax cuts, have helped the economy shift into a higher gear during the summer, economists say. The next challenge is making sure the rebound is self-sustaining, they say.

The economy’s recovery from the 2001 recession has seen a pattern of fits and starts, where a quarter of strength often has been followed by a quarter of weakness. That pattern could be broken, considering increasing signs that the economy finally has shaken its lethargy and is perking up, economists say.

The economy, which registered lackluster growth rates of just 1.4 percent in both the final quarter of 2002 and the first quarter of this year, broke out of the doldrums in the second quarter and grew at a 3.3 percent pace.

Economists are expecting economic growth at a blistering pace in the third quarter, in the range of 6 percent to 7 percent. The government will release the economy’s third-quarter growth figure Thursday. In the final quarter of this year, economists believe the economy will expand by around a 4 percent pace.

Consumers are spending sufficiently to keep the economy going. Manufacturing is improving. A long freeze on business investment shows signs of a slow thaw. In September, for the first time in eight months, the economy added jobs – 57,000 of them – helping to keep the unemployment rate steady at 6.1 percent.

Signs of improvement in the job market triggered a rebound in a measure of consumers’ confidence in the economy in October, a private research group reported Tuesday.

After posting a decline in September, the Conference Board’s Consumer Confidence Index jumped to 81.1 in October, up from a revised 77.0 in September.

Sustained turnarounds in capital spending and in hiring are crucial to the economy’s return to full throttle. Economists said business wants profits to improve and wants to be sure of the recovery’s vigor before it goes on a spending and hiring spree.

Short-term rates controlled by the Fed have remained low, but longer-term rates set by financial markets have swung back and forth. In mid-June, 30-year mortgage rates dipped to a four-decade low of 5.21 percent, then reached 6.44 percent in early September before retreating to 6.05 percent last week.

Fed policy-makers don’t want their efforts to keep short-term rates low to be undermined by rising long-term rates, which could cut short the economic recovery.

For that reason, the Fed repeated its concerns about inflation moving down, rather than up.

“The risk of inflation becoming undesirably low remains the predominate concern for the foreseeable future,” the Fed said.