The Fed leaves interest rates alone

Associated Press

WASHINGTON -At a time of high political uncertainty, the Federal Reserve decided Wednesday the best course for the nation’s monetary policy on Wednesday was to leave interest rates exactly where they have been for the last six months.

The Fed announced following its closed-door deliberations that it was keeping its target for a key short-term interest rate unchanged at 6.5 percent, a nine-year high.

The federal funds rate, the interest that banks charge each other, has been at that level since May 16 when the Fed increased rates for the sixth time in an effort to slow economic growth and keep inflation under control.

While Wall Street had widely expected rates to remain unchanged, stocks tumbled after the midafternoon announcement because of disappointment that the central bank kept its policy directive, intended to signal the future direction of rates, tilted toward further increases.

“The market was clearly disappointed, but unfortunately it isn’t possible for the central bank to be optimistic on inflation risks at this point. It’s just too early,” said Allen Sinai, chief economist at Primark Global Economics.

Many investors were hoping that a string of weak corporate earnings reports, which have pushed stock prices down sharply, plus spreading signs of an economic slowdown, would prompt the Fed to take a neutral stance in its policy statement, indicating a balance of risks between inflation and recession.

Instead, the Fed statement said it still viewed the risks as weighted toward “heightened inflation pressures,” citing continued tight labor markets and this year’s surge in energy prices.

The central bank did agree that economic growth was slowing, something it has been trying to engineer with its interest rate increases, and it said this slower growth could last “for some time.”

“The Fed is saying we see the economy slowing, but we don’t see it turning into a recession,” said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

The economy, which was surging ahead at an annual growth rate of 5.6 percent in the spring, slowed dramatically to a 2.7 percent rate in the July-September quarter.

The strong growth early in the year helped push unemployment down to a 30-year low of 3.9 percent, where it is currently. Many economists believe the Fed is aiming to keep growth below 4 percent over the next few quarters, pushing the unemployment rate up modestly to 4.5 percent by this time next year.

Various analysts said as long as the economy slows and inflation remains well behaved, they did not expect any further interest rate increases. But they also cautioned against expecting any rate cuts, given the Fed’s continued concerns about inflation pressures. Some said the next rate move will be a cut, but not before the second half of next year.

The Fed’s six rate hikes from June 1999 through May of this year have pushed borrowing costs upward for millions of Americans, with the benchmark prime rate now at a nine-year high of 9.5 percent.

“It is going to be a while before we see any Fed moves to reduce rates. Right now the economy is slowing and that is what they want,” said Martin Regalia, chief economist for the U.S. Chamber of Commerce.