Fed Lets Key Rate Stand

The Federal Reserve left its benchmark lending rate unchanged Tuesday in an effort to prop up an economy that, despite more than six months of growth and impressive new efficiency gains, continues to slouch uncertainly toward recovery.

Fed policymakers left the so-called Fed funds rate--the interest that banks charge each other for short-term loans--at a 40-year low of 1.75%, where it has been since December. The move assures Americans that they will continue enjoying some of the lowest borrowing costs in decades.

Despite widespread predictions earlier in the year that the economy would recover quickly, the central bank said in a statement after its meeting Tuesday that “the degree of the strengthening in final demand over the coming quarters ... is still uncertain.”

And central bank policymakers omitted from Tuesday’s statement a key phrase that followed their meeting in March--that the economy “is expanding at a significant pace.”

“They’re recognizing that we’re going through a significant downshift from the first quarter,” said Allen Sinai, global chief economist at Decision Economics Inc., a New York-based forecasting firm.

Separately, a new report showed that productivity--the economy’s ability to produce goods or perform services per hour of work--unexpectedly grew at its fastest pace in nearly two decades during the first quarter of the year. The increase gives the Fed more maneuvering room to keep interest rates low by serving as a bulwark against a revival of inflation.

“The numbers confirm the ‘new economy’ is alive and still with us,” said Mark Zandi, chief economist with Economy.com, a West Chester, Pa., forecaster.

The Fed decision had been widely anticipated. Indeed, the stock market sloughed it off almost as if it had not happened. The Standard & Poor’s 500 slid to its lowest level in seven months, while the Dow Jones industrial average climbed, but only modestly. By now, all major market measures are down for the year.

Nevertheless, the central bank decision was a striking illustration of the confusing condition of the economy, which has beaten the odds of a stock crash and terror attacks to make a comeback--but without enough power to convince investors and some economists that growth is self-sustaining.

On the plus side, the economy expanded at a 5.8% annual rate from January through March, and has continued growing in all but one quarter since March 2001, when, according to an official panel, it slipped into recession. In doing so, it has defied the traditional definition of a recession as two consecutive quarters of contraction, prompting doubts about whether it suffered a downturn.

In the minus column, unemployment hit a 7 1/2-year high of 6% last month, when the economy added its first jobs since July, and corporate investment has come to a virtual standstill.

“It’s unusual to be uncertain about where we’re headed this far into a recovery,” said David M. Jones, chief economist with investment firm Aubrey G. Lanston & Co. in New York. Under these conditions, he said “the Fed is in no hurry to hike rates. It’s afraid the economy isn’t strong enough to tolerate it.”

By leaving the rate unchanged, the Fed ensured that the commercial banks’ prime rate, off which the borrowing costs of millions of business and consumer loans are keyed, will remain at 4.75%, its lowest level since 1965. Low rates should encourage consumers to keep buying and may eventually persuade businesses to resume making capital investments.

The value of those business investments appeared to be borne out in the latest productivity figures, which showed the government’s measure of the amount of work performed by American employees per hour rose at an exceptionally strong 8.6% annual rate from January through March.

That was the fastest rate since a 9.9% jump in the second quarter of 1983. It was substantially above the 5.5% pace of growth during the last three months of last year, and was a full point higher than most economists had predicted.

Analysts said that a large part of the improvement was cyclical and occurs whenever the economy comes out of recession. But they added that part of it was traceable to new technology that allowed companies to boost output even as they cut work hours.

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Productivity on the Rise

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