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Fed Leaves Interest Rates Unchanged

Updated:
WASHINGTON (AP) — The Federal Reserve, encouraged that the record-breaking economy is slowing to a more sustainable but still-healthy pace, decided Wednesday against raising interest rates.

A key rate controlled by the Fed, called the federal funds rate, will stay at 6.5 percent, the highest level in nine years. The funds rate is the interest that banks charge each other on overnight loans.

Instead of being cheered by the no-rate-increase stance, investors apparently were upset by the Fed's indication that it was not closing the door to future increases. The Dow Jones industrial average, which was up 113 points when the Fed announced its decision, plunged 90 points within 15 minutes. The Dow recovered some ground, narrowing its lost to around 15 points in afternoon trading.

The central bank's decision came after the end of a closed-door meeting of the Federal Open Market Committee, the officials, including Fed Chairman Alan Greenspan, who set interest rate policy.

The outcome had been widely expected by private economists, especially with the uncertainty surrounding the presidential election, which has given Wall Street one more thing to worry about.

It marked the fourth meeting in a row in which the Fed passed up the chance to raise rates another time this year. The Fed left interest rates unchanged at its June, August and October meetings, citing signs of moderating economic growth.

In a statement explaining its decision Wednesday, the Fed said increased energy prices still raise inflation dangers down the road. But the Fed also noted a ``softening in business and household demand.''

In the part of the statement that reflects possible future moves, the central bank left the door open to further rate increases. The Fed said it believes the risks continue to be ``weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future.''

The Fed said it is still concerned about tight labor markets and rising energy prices, saying they threaten ``the possibility of raising inflation expectations.''

Diane Swonk, chief economist for Bank One in Chicago, doesn't foresee the Fed anytime soon either moving to a stance where it would be neutral about the prospects of additional rate increases in the future or easing interest rates ``because there's still a heck of a lot of cheer in this economy.''

Without a boost to the key funds rate, commercial banks won't feel the need to raise their prime lending rate, a benchmark for millions of loans, from home equity and unpaid credit card balances to short-term loans for businesses.

The prime rate stands at 9.5 percent, its highest level since January 1991, when the country was in its last recession.

Since June 1999, the Fed has raised rates six times with the goal of bringing about a ``soft landing'' — slowing economic growth enough to keep inflation under control but not so much as to cause a recession.

The Fed's last rate increase — by a bold half-point — was in May. That pushed the funds rate to 6.5 percent. In June 1999, before the central bank started raising rates, the funds rate stood at 4.75 percent.

Analysts believed the spring rate increases were designed to complete the job and allow the Fed to stay on the sidelines in the closing months of the presidential campaign.

Many private analysts said the central bank's rate increases are working to slow to a more sustainable pace a sizzling economy in its longest-ever streak of uninterrupted growth. That, in turn, will help keep inflation under control, they added.

Economic growth, which roared ahead at a 5.6 percent annual rate in the second quarter, slowed dramatically in the July-September quarter to a rate of just 2.7 percent. Consumer spending, a key engine of the economy, has shown signs of cooling a bit as the nation's biggest retailers reported lackluster sales last month.

Two other reports released Wednesday also provided additional evidence of the slowing economy: Industrial production fell 0.1 percent in October, the second decline of the year, and businesses slowed their inventory-building efforts in September.

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On the Net: Federal Reserve: http://www.federalreserve.gov
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