Fed's seven-month pause could turn into a much longer hold

WASHINGTON (AP) _ The Federal Reserve's seven-month pause in changing interest rates could turn out to be a lot longer. Some analysts think the Fed could stay on hold for all of 2007. <br/><br/>That

Thursday, February 1st 2007, 6:07 am

By: News On 6

WASHINGTON (AP) _ The Federal Reserve's seven-month pause in changing interest rates could turn out to be a lot longer. Some analysts think the Fed could stay on hold for all of 2007.

That was the view after the Fed's latest comments on the economy relieved worries that the recent rebound in economic growth might be setting the stage for further interest rate increases.

The Fed on Wednesday left the federal funds rate unchanged at 5.25 percent, where it has been since the central bank's last rate hike in June of 2006.

While it had been widely expected that the central bank for the fifth straight meeting would leave rates alone, the surprising development came in the way the Fed described the economy.

It gave an upbeat reading on the prospects for economic growth and a benign view on the threat posed by inflation. Those views relieved investors who sent the Dow Jones industrial average surging by nearly 100 points Wednesday to a new closing high.

While the views of ``somewhat firmer economic growth'' and stabilization in the swooning housing market were welcome, the really beneficial comments came in the area of inflation.

While continuing to maintain that inflation posed a bigger risk going forward than an economic slowdown, the central bank said that recent developments on inflation were encouraging in the closely watched area of core inflation, which excludes volatile energy and food prices.

``Readings on core inflation have improved modestly in recent months and inflation pressures seem likely to moderate over time,'' the Fed statement concluded.

That brief comment was all investors needed to hear to stop fretting that the central bank was contemplating further interest rate increases in light of an economy that has exhibited unexpected strength in recent weeks.

``This was a message to the markets that you don't need to get overly worried that we could start hiking interest rates,'' said David Jones, chief economist at DMJ Advisors, a Denver-based consulting firm. ``It implies there will be no change in Fed policy through the end of this year.''

Analysts said Fed Chairman Ben Bernanke, who celebrates his first anniversary as Fed chairman Thursday, is close to achieving a hoped-for soft landing for the economy where growth slows enough to keep inflation under control without slowing so much that the country is pushed into a recession.

That is a pretty good accomplishment for Bernanke's first year given that his predecessor, Alan Greenspan, was able to achieve just two soft landings in his 18 1/2 years as Fed chairman.

``Bernanke has the economy right where he wants it,'' said David Wyss, chief economist at Standard & Poor's in New York. ``They are in the process of achieving a soft landing. So far so good.''

The recent spate of good economic statistics included a report Wednesday just before the Fed began its second day of discussions that the overall economy, as measured by the gross domestic product, grew at a surprisingly strong 3.5 percent rate in the final three months of 2006.

That compared with lackluster growth of just 2.6 percent in the spring and 2 percent in the summer. The rebound in the fourth quarter reflected stronger growth in consumer spending and an improving trade deficit, which helped offset a sharp slump in housing and auto manufacturing.

While many analysts believe the Fed could stay on hold for the rest of this year, some economists held out the possibility of rate cuts in the second half of 2007. At that time, inflation will have moderated further and a rising unemployment rate will send the Fed searching for ways to give the economy a slight boost.

``With core inflation expected to move down gradually in 2007, there should be some room for the (Fed) to reduce rates by about a quarter point later in the year,'' said Brian Bethune, chief U.S. economist at Global Insight.

Mortgage rates have been rising recently as financial markets grew worried that the rebound in economic growth would raise concerns on the inflation front at the Fed.

Analysts said those concerns should ease a bit with the Fed's latest statement but they still looked for mortgage rates to trend slightly higher in coming months.

The 30-year mortgage rate, currently at 6.25 percent, could rise to around 6.75 percent in coming months, still at a historically low level but above the four-decade low of 5.2 percent reached in the spring of 2003.