Slowing economy, retreating energy prices helped Fed leave rates alone

WASHINGTON (AP) _ A slowing economy and retreating energy prices made it somewhat easier for the Federal Reserve to hold interest rates steady last month. <br/><br/>That was in sharp contrast to the August

Wednesday, October 11th 2006, 1:17 pm

By: News On 6

WASHINGTON (AP) _ A slowing economy and retreating energy prices made it somewhat easier for the Federal Reserve to hold interest rates steady last month.

That was in sharp contrast to the August meeting where policymakers wrestled with their next move. They ultimately decided at the August session to halt a two-year string of interest rate increases. But the Fed members also said that had been a close call.

At the Sept. 20 meeting, some softer indicators of economic activity and slightly lower readings on core inflation ``pointed to a modestly better inflation outlook and hence made the policy decision today somewhat less difficult than it was in August, when it was seen as a particularly close call,'' said minutes of the session released Wednesday.

September's decision marked the second meeting in a row where policymakers decided to leave interest rates alone.

Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, Va., was the lone dissenter at both meetings. Lacker said he would have preferred that the Fed increase interest rates by one-quarter of a percentage point.

``Mr. Lacker dissented because he believed that further tightening was needed to bring inflation down more rapidly than would be the case if the policy rate were kept unchanged,'' the minutes of the September meeting said.

The Fed minutes said ``many meeting participants emphasized that they continued to be quite concerned about the outlook for inflation.''

But looking ahead, most participants thought that inflationary pressures would eventually ease, in part as the economy slowed down and in part due to falling energy prices.

On the growth side of economic equation, policymakers said a ``significantly more sluggish performance than anticipated could not be entirely ruled out.''

The economy, which grew at a brisk 5.6 percent annual rate in the opening quarter of this year, slowed to less than half that pace in the April-to-June period. Private economists believe growth will clock in at a subdued pace of around 2.6 percent for the rest of this year.

The Fed minutes said that policymakers focused especially on developments in the slumping housing market, which has contributed greatly to the slowdown in overall economic growth.

That's one of the big wild cards in the economic outlook.

``Considerable uncertainty was expressed regarding the ultimate extent of the downturn in the housing sector and the degree to which the slowing in housing activity and the deceleration in home prices'' would affect consumers, businesses and thus the overall economic activity, the minutes said.

The Fed's goal is to slow the economy sufficiently to thwart inflation but not so much as to cripple economic activity.

Until halting its rate-raising campaign in August, the Fed had boosted interest rates 17 times since June 2004 to keep inflation and the economy on an even keel.

The Fed's next meeting is Oct. 24-25 and many economists believe the central bank will leave rates unchanged for the third straight meeting, giving more breathing space to borrowers.

If that turns out to be the case, the central bank's key interest rate will remain at 5.25 percent. And, commercial banks' prime interest rate _ for certain credit cards, home equity lines of credit and other loans _ would stay at 8.25 percent.