Fed Keeps Interest Rates Steady
Tue May 7, 2:28 PM ET
By Glenn Somerville
WASHINGTON (Reuters) - Federal Reserve (news - web sites) policymakers opted on Tuesday to keep U.S. interest rates steady at four-decade lows, trying to keep an unevenly paced recovery rolling with cheap credit for consumers and businesses.
Policymaking members of the Federal Open Market Committee (news - web sites) voted unanimously to keep its trendsetting federal funds rate for overnight loans between banks at 1.75 percent. The more symbolic discount rate was also unmoved at 1.25 percent.
In a statement issued after the meeting, policymakers cited an "uncertain" outlook for final demand and said risks remained balanced between inflation and recession.
Calling current monetary policy "accommodative," the Fed said that since its March meeting, the economy had nevertheless received a substantial push from a "marked swing in inventory investment."
Overall, the Fed's wording indicated concern about recent soft economic data which have included a rise in the April unemployment rate to the highest level in more than 7-1/2 years. Financial markets fully anticipated steady interest rates so market reaction was muted.
Many analysts now say it is unlikely the Fed will begin raising rates before August at the earliest.
"The last thing the Fed wants to do is act prematurely and send the economy back into recession -- the proverbial 'double dip,"' said Richard Yamarone, Chief Economist at Argus Research in New York.
U.S. economic growth barreled ahead at a 5.8 percent annual rate during the first quarter this year as businesses further cut inventories that had built up during last year's downturn.
Fed Chairman Alan Greenspan (news - web sites) has said that for a sustainable and robust recovery, the stimulative impact of inventory drawdowns must be replaced by demand vigorous enough to spur business investment and fatten company profits. The booming pace of first-quarter gross domestic product growth is seen as unlikely to be repeated during the balance of the year.
Greenspan told Congress on April 17 that there will be "ample opportunity" to start raising interest rates once there was clear evidence that a sustained recovery had taken hold.
Recently, a mood of unease about the pace of the U.S. recovery has settled over financial markets in the United States and abroad, where the U.S. dollar has fallen versus currencies of major trading partners. Stock prices also have been battered by doubts that corporate earnings will be high enough to warrant steady price gains.
The U.S. unemployment rate climbed to 6 percent in April, its highest since 1994, while the University of Michigan's consumer confidence index (news - web sites) slipped from recent highs last month.
Typically, new hiring lags in an economic recovery since companies avoid adding positions until they are sure solid growth is in place.
Gangbuster growth in productivity, or worker output per hour, of 8.6 percent in the first quarter means that firms are not rushing to hire. However, the number should also help keep inflation fears at bay.
Analysts say the Fed may hold off boosting rates until it sees clear signs that companies are optimistic enough about future growth prospects to start adding more permanent employees to their payrolls. |
