Federal leaves key interest rate unchanged

<br>WASHINGTON (AP) _ With two members dissenting, the Federal Reserve on Tuesday left a key interest rate unchanged as the nation's economic recovery struggles to ride out the roller-coaster stock

Tuesday, September 24th 2002, 12:00 am

By: News On 6

WASHINGTON (AP) _ With two members dissenting, the Federal Reserve on Tuesday left a key interest rate unchanged as the nation's economic recovery struggles to ride out the roller-coaster stock market and rising worries about war with Iraq.

While the Fed held short-term interest rates steady, it continued to leave the door open to future rate reductions if economic conditions worsen.

By keeping rates low or possibly nudging them down later, Fed policy-makers hope to motivate consumers to spend more and businesses to ramp up investment, something that would strengthen the fragile recovery.

Two of the 12 Fed members _ Edward Gramlich and Robert McTeer _ voted against the central bank's decision on Tuesday to leave rates unchanged. They wanted to see the funds rate lowered.

On Wall Street, the markets slipped even further after the Fed announcement. In mid-afternoon, the Dow Jones industrial average was down more than 170 points.

The Fed said that economic information since its last meeting on Aug. 13 suggests that consumer and business demand is ``growing at a moderate pace.''

Over time, the Fed's currently low interest rates and gains in productivity should be ``sufficient to foster an improving business climate,'' it said.

However, the Fed said that ``considerable uncertainty persists about the extent and timing of the expected pickup in production and employment owing in part to the emergence of heightened geopolitical risks.''

For now, Federal Reserve Chairman Alan Greenspan and his Federal Open Market Committee colleagues opted to hold the federal funds rate _ the interest that banks charge each other on overnight loans _ at 1.75 percent, the lowest level in 41 years. It marked the sixth consecutive Fed meeting this year that policy-makers decided to leave rates alone.

However, the Fed continued to view the possibility of weak economic conditions, rather than inflation, as the greatest risk to the economy. That signaled that the Fed is prepared to cut rates, if necessary.

President Bush remained upbeat, telling reporters at the White House that ``when you combine the productivity of the American people with low interest rates and low inflation, those are the ingredients for growth.''

But we have more work to do,'' he said. ``There are things that Congress and the administration can do together to make sure that people work.''

The Fed's decision to hold the funds rate steady means that commercial banks' prime lending rate _ the benchmark for many loans _ will remain at 4.75 percent, the lowest level since November 1965.

After being knocked down by last year's recession, the economy is back on its feet but isn't bursting with vitality. Stock market woes, a stagnant job market and heightened concerns about a war with Iraq could threaten the recovery.

In addition, a report Tuesday showed that consumers' confidence in the economy sank in September to its lowest level in 10 months, raising new questions about consumers' willingness to spend in the coming months.

Businesses, meanwhile, have remained reluctant to make big commitments in hiring and capital spending, two factors restraining the recovery. Manufacturing _hardest hit by the recession _ lost considerable momentum in August.

Economists say a sustained turnaround in business investment _ a necessary ingredient for the economy to get back to full health _ won't come about until companies feel better about the economy and see their profits, which took a hit during the slump, recover.

Layoffs have been rising recently, and economists are predicting that the nation's jobless rate _ now at 5.7 percent _ will probably increase slightly in the months ahead.

Consumers, whose spending accounts for two-thirds of all economic activity in the United States, have been the primary engine keeping the economy going.

They have taken advantage of free-financing deals to buy automobiles and home appliances. And, low interest rates have motivated them to buy homes at such a brisk pace that experts predict both sales of new and existing homes will set records this year.

Low interest rates, good deals, rising home values and extra cash coming from a refinancing boom are all helping to support consumer spending. Thus far, those positive factors have offset some potentially negative ones, including the volatile stock market, the lackluster job market and eroding consumer confidence.

Consumer confidence fell for the fourth month in a row in September, sinking to its lowest level since November, the Conference Board reported. The board's Consumer Confidence Index fell to 93.3 from a revised 94.5 in August.

For short-term interest rates to move even lower, the Fed would probably need to see clear trouble signs that the nation's economy was slipping back into recession, analysts say.

While many analysts consider a ``double dip'' recession scenario remote, it can't be ruled out, they say.

A dramatic and prolonged rise in energy prices stoked by Middle East tensions, a big cutback in spending by consumers _ the driving force behind the economy _ would probably send the economy into a nosedive, analysts say.

The economy grew at a tepid 1.1 percent in the second quarter, but could grow at a rate of around 3 percent or more in the current quarter. But increasing numbers of economists believe the economy will lose momentum again during the final quarter of this year.