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Fed Leaves Rates Alone Again

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TIMES STAFF WRITER

The Federal Reserve Board decided Wednesday not to raise interest rates, a sign that it is becoming less anxious about a possible renewal of inflation pressures here at home and more worried about the impact of the Asian economic slump.

After a two-day meeting, the board’s policy-setting Federal Open Market Committee voted to hold its target for the benchmark “federal funds” rate--the interest that banks charge on overnight loans to one another--at 5.5%, the level that has prevailed for the last 16 months.

Analysts said the panel’s decision suggested that policymakers have become convinced that economic growth in the United States has finally begun to slow, and that uncertainty over Asia’s economic situation has become their primary concern.

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As a result, David M. Jones, Fed watcher for Aubrey G. Lanston & Co., said analysts now expect that the Fed “won’t raise interest rates any time soon.” He said the months-old tug of war between concerns about the domestic economy and Asia “wasn’t as bad this time around.”

The committee’s decision came as the government and two privately financed statistics-gathering organizations made public a spate of new figures that bolstered analysts’ contentions that the domestic economy finally has begun to slow:

* The Conference Board reported that its index of leading indicators was unchanged in May following a lackluster 0.1% rise in April, suggesting the economy’s growth rate will slow during the second half of this year.

* The National Assn. of Purchasing Management said its index of activity in the manufacturing sector of the economy fell to 49.6 in June from 51.4 in May--a weaker performance than had been expected--reflecting a decline in export orders and a falloff in inventory building.

* The Commerce Department reported that construction activity fell 1.5% across the United States in May following a revised 0.5% gain in April, with a significant weakening of new orders for commercial construction.

The Fed’s decision Wednesday was all but discounted in the financial markets, which had assumed that it would keep interest rates intact. The Dow Jones industrial average surged 96.65 points to 9,048.67 over optimism about Japan’s new moves to stabilize its banks.

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The Fed has been agonizing over whether to raise interest rates almost since its last such action, in March 1997. At that time, it boosted the federal funds rate by one-quarter of a percentage point in what was viewed as a preemptive strike to head off new inflation.

The fear then was that unless the Fed acted decisively, the economy would overheat and the rapidly tightening labor markets would create new pressures for faster wage increases that could be the first step in a revival of inflation.

In recent weeks, however, there have been increasing signs that the economy finally has begun to slow a bit, partly as a result of the worsening slump in Asia, which has cut into U.S. export orders from that region.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Purchasing Managers’ Index

June: 49.6

Source: National Assn. of Purchasing Management

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