Federal Reserve Leaves Rates Unchanged
Federal Reserve policymakers decided Wednesday to keep U.S. short-term interest rates unchanged at four-decade lows, biding their time as they await signs that a full-throttle recovery is in place.
The Fed’s policy-setting Federal Open Market Committee announced at the close of a two-day meeting that it voted unanimously to maintain its federal funds rate target at 1.75%. The more symbolic discount rate, charged to banks for loans directly from the Fed, also was unmoved at 1.25%.
In its statement, the Fed acknowledged the economy had softened after an inventory-led bounce in the first quarter. But it expressed cautious optimism.
“The committee expects the rate of increase of final demand to pick up over coming quarters, supported in part by robust underlying growth in productivity, but the degree of the strengthening remains uncertain,” the statement said.
The Fed said risks were equally balanced between economic weakness and a flare-up in inflation, a stance unchanged from the last meeting on May 7, but economists said the post-meeting statement’s overall tone indicated no rate increases were likely in the immediate future.
“There is a hint that they do not see any reason to tighten in the near term,” said Alan Ruskin, research director at 4Cast Ltd. in New York. “They are moderating the perception of an [economic] upside and moderating expectations of a Fed tightening further out as well.”
The widely expected decision to stand pat on rates came amid growing market unease and with the economy still edging ahead unevenly. Recent data have shown the economy in a gradual recovery--growing once more after a brief recession last year but at an uneven pace that analysts say has delayed the Fed’s anticipated timetable to begin raising rates.
The Fed cut rates 11 times last year by a total of 4.75 percentage points to revitalize the flagging economy.
A general sense of queasiness in financial markets, prompted by a seemingly unending series of accounting scandals, concern over corporate profits and a weakening dollar, has cast a shadow across a generally favorable second-half economic outlook and could unsettle consumers.
Still, the government reported Wednesday that sales of new homes hit a record seasonally adjusted annual rate of 1.028 million units in May, up 8.1%, while orders for durable goods were up 0.6% last month. The pickup in durables orders indicated the nation’s factory sector, which bore the brunt of last year’s economic slowdown, might be getting its feet under it once more.
These orders are taken partly as a sign of heavy industries’ willingness to invest in expanded production facilities, something that Fed Chairman Alan Greenspan monitors closely and regards as essential to a sustained recovery.
Any indication of a firming in business investment could be heartening to Fed policymakers.
“Capital investment is not going anywhere very fast,” Greenspan said of the economy earlier this month during an appearance in Montreal with other central bankers from key European economies and from Japan. “Our outlook at the Fed hasn’t really materially changed since January,” he said at that time.
