Fed leaves interest rates unchanged for fifth straight meeting

WASHINGTON (AP) _ The Federal Reserve left interest rates unchanged on Wednesday but gave Wall Street a lift by expressing some relief at the prospects for inflation. <br/><br/>The central bank voted to

Wednesday, January 31st 2007, 8:04 am

By: News On 6

WASHINGTON (AP) _ The Federal Reserve left interest rates unchanged on Wednesday but gave Wall Street a lift by expressing some relief at the prospects for inflation.

The central bank voted to leave the federal funds rate, the interest that banks charge each other, at 5.25 percent, where it has been since last June.

The Fed continued to say it was more worried about the risk of inflation than weak growth, however, signaling that future interest rate hikes were still possible. But the Fed said recent developments on inflation have been favorable.

"Readings on core inflation have improved modestly in recent months and inflation pressures seem likely to moderate over time," the Fed said in its new statement.

Financial markets, which had been growing increasingly worried that the Fed would hike rates in coming months in response to stronger-than-expected growth, posted a strong rally in response to the Fed's comments.

The Dow Jones industrial average was up more than 100 points in the half-hour after the Fed's announcement.

"This is as close to very good news for the markets as anyone could have asked for," said David Jones, chief economist at DMJ Advisors, a Denver-based consulting firm.

Jones said he believed the Fed would keep interest rates unchanged through all of 2007. That would be a better outcome than recent fears that the Fed might resume raising interest rates because of worries that the stronger economy would not allow inflation pressures to subside.

The rate action was supported by a unanimous 11-0 vote of the Federal Open Market Committee, the panel of Fed board members in Washington and regional bank presidents who meet eight times a year to set interest rates.

At the previous four meetings, Jeffrey Lacker, the president of the Richmond Fed regional bank, had dissented in favor of a further boost in rates. However, he is not a voting member of the FOMC this year.

The action means that banks' prime lending rate, the benchmark for millions of consumer and business loans, will remain unchanged at 8.25 percent.

On Wednesday before the Fed announcement, the government reported that the economy grew at a solid annual rate of 3.5 percent in the final three months of 2006 as strong consumer spending and an improving trade picture offset severe slowdowns in housing and auto production.

In its statement explaining its actions, the Fed said, "Recent indicators have suggested somewhat firmer economic growth and some tentative signs of stabilization have appeared in the housing market."

Since the Fed's last meeting Dec. 12, the economic news has been uniformly good, with job growth stronger than expected, energy prices dropping and the overall economy navigating the rough waters of a severe housing slump.

The Fed last changed rates back in June when it pushed the federal funds rate, the interest that banks charge each other, up to 5.25 percent.

It marked the 17th consecutive meeting that the central bank had nudged rates up by a quarter-point. Before the Fed started raising rates in June 2004, the funds rate was at 1 percent and the prime rate stood at 4 percent, both the lowest levels in more than four decades.

The Fed is hoping to engineer a "soft landing" in which the economy slows and inflation pressures are lowered but the slackening of business activity doesn't spell recession.