Fed Keeps Interest Rates Steady

The Federal Reserve kept interest rates steady at four-decade lows as expected Tuesday, saving its ammunition in hope that the economy can forge its way past a “soft spot” to more vigorous growth in 2003.

The unanimous decision by the central bank’s Federal Open Market Committee leaves the trend-setting federal funds rate at 1.25%, the level it hit after the Fed slashed borrowing costs by a bold half percentage point in November.

“The limited number of incoming economic indicators since the November meeting, taken together, are not inconsistent with the economy working its way through its current soft spot,” Fed policymakers said in a statement after their meeting that added little new to the assessment offered last month.

Analysts said the Fed clearly hoped it was done cutting rates -- but the wording of the statement pointed to a sliver of doubt.

The big cut in November was the only rate reduction in 2002. But the Fed lowered interest rates 11 times in 2001 as it bid to pull the economy out of a shallow recession and to give it some lift after the shock of the Sept. 11 terrorist attacks.

“I think the Fed has probably done all it is going to do for this economic cycle unless some major surprises occur such as a messy war in the Middle East or the housing bubble bursting,” said Sung Won Sohn, chief economist at of Wells Fargo & Co. in Minneapolis.

Policymakers also maintained their characterization of the risks the economy faces as being evenly balanced between rising prices and a renewed downturn.

This was the position they adopted last month when they cut rates, and it was seen as a signal of steady rates for some time ahead.

Recent economic data have offered a mixed picture of the economy’s prospects. The national unemployment rate unexpectedly rose to 6% in November, and a report Tuesday said sales at U.S. chain stores faltered last week.

But a separate report Tuesday showed that October wholesale inventories fell for the first time in half a year -- a promising sign in that new orders may pick up because warehouses must be restocked to keep up with demand.

Fed policymakers said in November that they believed the economy was going through a weak patch and that, with the half-percentage-point cut and the series of rate reductions in 2001, interest rates were low enough to keep growth going.