Fed Closes Its Year With No Change in Interest Rates
The Federal Reserve Board passed up a chance to raise interest rates at its final meeting of the year Tuesday despite a report showing newfound strength in housing.
Following more than 3 1/2 hours of closed-door discussions, Fed policymakers announced that they had decided to leave rates alone, meaning that millions of consumers and businesses whose loans are tied to Fed rates will see no change in their borrowing costs.
The Federal Open Market Committee, composed of Fed governors in Washington and regional bank presidents, meets eight times a year to review interest rate policies. The panel next meets Feb. 4.
Most economists believe there will be no change at that meeting, either, and some analysts are even forecasting the central bank could stay on hold for most of 1997.
“The U.S. economy remains on a moderate-growth, low-inflation path, very much in line with Fed hopes,” said Bruce Steinberg, senior economist at Merrill Lynch in New York. “We believe the Fed will remain on hold through the first half of 1997 and probably through most of the second half as well.”
Financial markets, which had been set on edge by remarks earlier in the month by Fed Chairman Alan Greenspan about “irrational exuberance” in the markets, were reassured by Tuesday’s decision.
The Dow Jones industrial average finished up 39.98 points to close at 6,308.33. The bond market, which had lost ground after a stronger-than-expected housing number, showed little reaction to the Fed decision. The yield on the Treasury’s benchmark 30-year bond was at 6.65%, up from 6.62% on Monday.
The government reported before the Fed’s deliberations began that housing construction shot up 9.2% in November to a seasonally adjusted annual rate of 1.51 million units--far above Wall Street economists’ forecasts for 1.39 million. It was the strongest monthly increase since an 11.5% surge 16 months earlier in July 1995.
In the West, which is dominated by California, starts were unchanged from October at a rate of 364,000.
There are indications that a moderate bounce-back in housing may continue for a few more months.
For example, applications for building permits picked up in November after three consecutive monthly drops, rising 3.9% to 1.415 million.
And on Monday, the National Assn. of Home Builders reported that its index of market activity rose slightly in December, reversing a downward trend that began in June.
“The recent decline in interest rates has apparently improved builders’ perception of the marketplace,” said association president Randy Smith, a builder in Walnut Creek, Calif.
The housing industry is headed for one of its best building and sales years in many years, as steady employment growth has kept incomes rising and boosted consumer confidence in the economy’s future.
In addition, mortgage rates have remained relatively low by historical standards, and even declined in November.
However, recent statistics leave it unclear where the overall economy is headed, with some reports, such as housing, showing strength and others showing weakness, making it harder than usual to guess the central bank’s next move.
“There are people who are betting toward tightness and some who are betting the Fed will next ease,” said David Munro, chief economist at High Frequency Economics in New York. “Everybody is guessing.”
* DOW REACTS
News brings buyers back to blue chips for first time in a week. D3
