Fed Keeps Interest Rates Steady

WASHINGTON (AP) _ The Federal Reserve held interest rates steady, extending a nearly yearlong period of stability that has positives for savers and borrowers. <br/><br/>Fed Chairman Ben Bernanke and his

Wednesday, May 9th 2007, 4:21 pm

By: News On 6

WASHINGTON (AP) _ The Federal Reserve held interest rates steady, extending a nearly yearlong period of stability that has positives for savers and borrowers.

Fed Chairman Ben Bernanke and his central bank colleagues on Wednesday left an important interest rate unchanged at 5.25%, where it has stood since last June. The decision was unanimous.

The Fed's decision means that commercial banks' prime interest rate _ for certain credit cards, home equity lines of credit and other loans _ stays at 8.25%.

Borrowers had suffered through two years of rate increases. But the current period of steadiness can help them regain their footing by paying down or consolidating debt, experts said, and predictable rates can help with investment decisions.

For savers, ``although rates have stabilized, they have stabilized at attractive levels,'' said Greg McBride, a senior financial analyst at Bankrate.com. ``They can earn in excess of 5% for a range of bank products from money market accounts to five-year CDs.''

On Wall Street, the Fed's action and views about the economy gave stocks a lift. The Dow Jones industrials gained 53.80 points to close at 13,362.87, a record.

Investors are craving an interest rate cut. But many economists believe the Fed may keep rates right where they are through most _ if not all _ of this year.

The Fed used the same language as it did at its previous meeting, in March, and said any future rate change will depend on data about growth and inflation.

Assessing economic conditions, Fed policymakers noted that growth slowed earlier this year and the economy is still feeling the impact of the housing slump.

While that was a tad more bearish than its previous assessment, Fed policymakers nonetheless continued to predict that the economy will expand at a ``moderate pace.''

The Fed also stuck to its forecast that inflation should recede over time. Yet it renewed its warning that underlying inflation _ which excludes food and energy prices _ remains ``somewhat elevated.'' Policymakers once again said that their ``predominant'' concern is if inflation fails to moderate as expected.

Inflation is bad for the economy and for peoples' pocketbooks. Out of control prices can eat away at workers' paychecks, investments and standards of living.

The Fed's goal is for the economy to slow sufficiently to fend off inflation, but not so much as to slide into a recession.

The Fed's decision to leave rates alone comes as economic growth has slowed, and inflation, while showing some improvement, is too high for the Fed's tastes.

Economic growth slowed to a near crawl of 1.3% in first quarter of this year, the worst performance in four years.

Fallout from the housing slump was the main culprit, causing businesses to tighten spending. Consumers, however, showed resilience and managed to boost their spending sufficiently to keep the economy moving ahead.

Some wonder just how much fervor consumers will have in the months ahead, given rising energy prices and some signs of cooling in job growth.

The unemployment rate edged up to 4.5% in April as payrolls grew by just 88,000, the fewest in two and a half years.

Energy prices have surged to a record nationwide average of $3.07 per gallon, according to oil industry analyst Trilby Lundberg. The previous record was $3.03 per gallon, on Aug. 11, 2006.

Inflation is running above the Fed's 1% to 2% comfort zone. An inflation gauge that excludes volatile energy and food prices was up 2.1% in March from a year earlier. That was better than the 2.45% annual increase logged in February.

``The Fed is really in a box right now. Growth in the early part of this year has been sluggish. On the other hand, prices are still under a lot of pressure. That doesn't really give the Fed room to either ease rates or tighten them,'' said Carl Tannenbaum, chief economist at LaSalle Bank.

Tannenbaum predicts rates will remain where they are through the rest of this year. Some other economists think the Fed could cut rates later this year if the economy shows signs of faltering and the unemployment rate kept climbing.