Federal Reserve Leaves Key Rates Alone

The Federal Reserve opted for a wait-and-see approach on U.S. short-term interest rates Wednesday, keeping them at four-decade lows and expressing hopes that the economy will pick up steam once U.S.-Iraq war fears lift.

“Oil price premiums and other aspects of geopolitical risks have reportedly fostered continued restraint on spending and hiring by businesses,” the central bank’s policy-setting Federal Open Market Committee said after a two-day meeting, its first of 2003.

“However, the committee believes that as those risks lift, as most analysts expect, the accommodative stance of monetary policy, coupled with ongoing growth in productivity, will provide support to an improving economic climate over time.”

The FOMC unanimously voted to keep the federal funds rate -- the rate for overnight loans between banks -- at 1.25%. The Fed cut the rate to that level from 1.75% in November.

The Fed also kept its “bias” on credit neutral, signaling it feels no immediate pressure to raise or lower rates. In the central bank’s terminology, the outlook is “balanced” with respect to the economy’s prospects and the risk of higher inflation.

Wall Street had expected the Fed to hold steady. Likewise, most analysts believe the Fed will make no change in rates at its next meeting March 18. A Reuters poll conducted late Wednesday of 20 of the 22 primary Treasury bond dealers that deal directly with the Fed found 15 saw no shift in March.

Even the outbreak of war between the U.S. and Iraq probably wouldn’t be enough to drive the Fed to cut rates again, said economist Joel Naroff of Naroff Economic Advisors.

“The war would have to go wrong in some way,” he said.

Still, some analysts said the economic recovery became increasingly fragile in the fourth quarter, raising the risks of another recession.

The Commerce Department today will give its first estimate of U.S. gross domestic product growth in the fourth quarter. Economists surveyed by Reuters see a lackluster 0.7% annualized growth rate, down from 4% in the third quarter.

Even if the Fed were to reduce rates again, some economists have questioned whether it would do much to spur borrowing and spending, with loan rates already at generational lows.