Fed's strategy on inflation keeps interest rates steady for second straight month

WASHINGTON (AP) _ The Federal Reserve gave America's borrowers a break and held interest rates steady for a second straight month, part of a strategy to put the economy and inflation on an even keel.

Wednesday, September 20th 2006, 3:07 pm

By: News On 6

WASHINGTON (AP) _ The Federal Reserve gave America's borrowers a break and held interest rates steady for a second straight month, part of a strategy to put the economy and inflation on an even keel.

In a 10-1 vote Wednesday, Fed Chairman Ben Bernanke and his colleagues decided to leave rates alone, suggesting that slowing economic activity eventually will lessen inflationary pressures.

With economic growth moderating and once-surging energy prices now receding, all but one of the Fed's voting members felt comfortable holding a key interest rate at 5.25 percent. That meant commercial banks' prime interest rate _ for certain credit cards, home equity lines of credit and other loans _ would stay at 8.25 percent.

``The moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market,'' the policymakers said in a brief statement released after their meeting.

The Fed's goal is for the economy to slow enough to reduce pressures from inflation, but not so much that it would risk falling into recession. The wild cards are energy prices and the cooling in the housing market after a five-year boom.

After surging past $3 a gallon in many areas, gasoline prices are now hovering around $2.50 a gallon nationwide. Oil prices closed at a record $77.03 a barrel in mid-July, but now are around $61.

The risk of inflation flaring up is still on the Fed's radar screen. But Fed policymakers believe inflation will calm down and they cited the drop in energy prices as a reason for optimism.

``Inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations and the cumulative effects'' of the Fed's 17 rate increases since June 2004, according to the statement.

That rate-raising campaign, halted on Aug. 8, was the longest series of increases in Fed history.

The Fed's decision Wednesday gives borrowers more time to catch their breath after all those increases and savers a chance to lock in respectable rates.

On Wall Street, stocks held onto their gains after the Fed's announcement.

Many economists think there is a good chance that the Fed again will stay on the sidelines at its next meeting, Oct. 24-25, and through the rest of this year.

``The Fed is on hold for the foreseeable future, expecting inflation to get better with a big assist from lower energy prices,'' predicted Stuart Hoffman, chief economist at PNC Financial Services Group.

The Fed is keeping its options open. It did not foreclose the possibility of raising rates if there were signs inflation was breaking out.

``Some inflation risks remain,'' the Fed said. ``The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth.''

For the second meeting in a row, Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, Va., was the lone dissenter. As he did at the August meeting, Lacker said he would have preferred the Fed boosting interest rates by one-quarter of a percentage point.

Ethan Harris, chief U.S. economist at Lehman Brothers, does not think the Fed is finished with raising rates and predicts one more increase this year. ``The core message of the Fed is watch and wait. Policymakers are not declaring victory,'' he said.

The economy is shifting from robust growth to more moderate activity _ a 5.6 percent growth rate for the first three months of 2006, then 2.9 percent in the spring. A rate of 2.5 percent is predicted through the rest of this year.

The decline reflects the cooler housing market after five years of record sales. A sharper-than-expected slowdown could mean trouble for the national economy.

The jobs climate, so far, is decent, as seen when unemployment dipped to 4.7 percent in August.

In addition, there has been some encouraging news on inflation: Consumer prices rose by just 0.2 percent in August, half the increase in July. But some measures of labor costs have risen.

Before the Fed began to tighten credit in 2004, the prime rate was 4 percent and a key rate was at 1 percent, a 46-year low. The Fed had sliced interest rates to rescue the economy from the 2001 recession, the Sept. 11 attacks and accounting scandals on Wall Street.