Fed Keeps Interest Rates at 5.25 Percent

Discussion in 'Economics' started by universaltrader, Mar 21, 2007.

  1. yahoo
    Wednesday March 21, 2:37 pm ET
    By Martin Crutsinger, AP Economics Writer
    Federal Reserve Leaves Key Interest Rate Unchanged at 5.25 Percent for Sixth Straight Meeting

    WASHINGTON (AP) -- The Federal Reserve left a key interest rate unchanged on Wednesday while taking note of the recent weaker economic performance and higher inflation pressures.

    The central bank voted to leave the federal funds rate, the interest that banks charge each other, at 5.25 percent. It marked the sixth straight meeting in which the Fed has kept the rate the same.

    As it has at previous meetings, the Fed said it was more worried about the risk of inflation than weak economic growth. But this time it dropped language that talked solely about the possibility that interest rates would be increased in the future.

    Economists believe it is highly unlikely that the Fed will boost rates in coming months, given troubles in the housing industry and sluggish economic growth.

    The market turmoil, which included a 416-point drop in the Dow Jones industrial average on Feb. 27, was triggered in part by troubles in the mortgage lending industry and worries that recession risks were increasing.

    The Fed took note of the weaker readings on the economy, saying, "Recent indicators have been mixed and the adjustment of the housing sector is ongoing."

    But the Fed retained language it has used in past statements, expressing the belief that the economy will keep growing at a moderate pace in coming months.

    The Fed decision had been widely expected, based on recent comments by Fed Chairman Ben Bernanke and other Fed officials who said they had not seen anything to change their expectations that inflation pressures will moderate this year and economic growth will rebound.

    The Fed last changed rates in June 2006 when it capped a two-year credit-tightening campaign with a 17th quarter-point rate increase. That move pushed the funds rate to 5.25 percent. It had stood at a 46-year low of 1 percent when the Fed began raising rates in June 2004.

    The decision Wednesday means that borrowing costs for millions of consumers and businesses will be unchanged, with banks' prime lending rate staying at 8.25 percent.

    In its statement, the Fed dropped language it had been using that the "extent and timing of any additional firming" would depend on upcoming data.

    In its place, the Fed said that any "future policy adjustments" would depend on the performance of both economic growth and inflation.

    That was a more balanced assessment of what the central bank might do in the future, holding out at least the possibility of rate cuts as well as rate increase.

    But the Fed continued to maintain that its "predominant policy concern remains the risk that inflation will fail to moderate as expected."

    The recent market troubles were blamed in part on rising financial strains among lenders dealing in risky loans -- so-called subprime mortgages made to borrowers with weak credit histories.

    Investors were also unnerved by comments that former Fed Chairman Alan Greenspan made about the possibility of a recession occurring by the end of this year. Greenspan has put the odds at one in three.

    Normally, the central bank would respond to spreading economic weakness by cutting interest rates. However, two reports on inflation last week showed that price pressures remain a problem with both wholesale and retail prices rising more rapidly in February.

    Excluding food and energy, consumer prices have been rising this year at an annual rate of 3 percent, far above the Fed's 1 percent to 2 percent comfort zone.

    Because of the inflation pressures, analysts said the Fed is unlikely to cut rates any time soon in response to the weaker economic data although they said rate cuts were still possible in the second half of this year if, as expected, inflation pressures calm down by then.

    Federal Reserve: http://www.federalreserve.gov
  2. Erring on the high side to keep inflation in check to thwart hyper inflation and keep demand for bonds (and therefore dollars) up. Low enough not to totally kill the economy, and give the folks with exotic mortgages a chance to bail out into fixed loans and allow the real estate professionals to move into other careers.

    IMHO, considering the competing forces they have to contend with, I think things could be a lot worse in either direction.

  3. I truly believe they should leave everything ALONE...Just once, lets allow the cycles to play out....Greenspan took out the internet bubble ( when he didn't have to) and then when he destroyed job creation and the economy went WAYYYY overboard the other way causing the Real estate bubble....it sucks but they should allow it to heal on its own rather then tinker every five freaking seconds..