Fed Leaves Rates Unchanged
Tuesday, May 06, 2003
The U.S. Federal Reserve (search)'s policy-setting panel, as expected, left short-term interest rates unchanged at its regularly scheduled meeting Tuesday, but opened the door to a possible rate reduction in the future in the event that business conditions take a turn for the worse.
Fed Chairman Alan Greenspan (search) and his Federal Open Market Committee (search) colleagues opted for now to keep the federal funds rate (search) at 1.25 percent. The funds rate is the interest banks charge each other on overnight loans and is the Fed's primary tool for influencing economic activity.
Holding the funds rate steady means that commercial banks' prime lending rate (search) -- the benchmark for many consumer loans -- will also remain at 4.25 percent, the lowest level since May 1959.
With the uncertainty brought about by the Iraq war dissipating, most of Wall Street expected the central bank to keep to the policy sidelines. In a Reuters survey, 20 of 22 dealers in U.S. government debt that do business directly with the Fed were expecting no change in policy.
However, the Fed sent a signal that its stands ready to lower rates.
The Fed identified the greatest risk facing the economy as a further weakening in economic activity. This stance positions the central bank to reduce the funds rate in an effort to bolster economic growth should the economy show signs of backsliding, economists say. The Fed's next meeting is June 24-25.
At the Fed's previous meeting on March 18, policy-makers said that given all the uncertainties surrounding the Iraq situation at that time, they could not gauge risks on the economy going forward -- something they normally do at each meeting.
The vote was unanimous.
"The committee believes that ... the balance of risks to achieving its goals is weighted mainly toward weakness over the foreseeable future," the Fed said.
Both the funds rate and the prime rate, which move in lockstep, were pushed down to their currently low levels on Nov. 6. That marked the Fed's first rate cut of 2002 and its 12th since January of 2001, when the central bank began an aggressive rate-reduction campaign in a bid to rescue a seriously distressed economy.
Tuesday's Fed decision comes as the postwar economy is struggling to get back on firmer footing.
The end of the war in Iraq hasn't produced an economic boom -- as some had hoped.
Consumers' confidence in the economy -- which had sunk under war worries -- rebounded in April, an encouraging sign.
But businesses -- still not feeling unsure about the strength of economy's recovery -- are wary of big investments in capital spending and in hiring. That's a major factor hurting the economy's ability to get back to full speed.
While the weak state of manufacturing and rising unemployment is disappointing, the Fed said that "the ebbing of geopolitical tensions has rolled back oil prices, bolstered consumer confidence and strengthened debt and equity prices."
President Bush, mindful of the political price his father paid in 1992 for a weak economy, wants Congress to approve another round of tax cuts that he argues would help bolster economic growth and create jobs.
The nation's unemployment rate jumped to 6 percent in April as businesses cut jobs for the third straight month. The economy has lost one-half million jobs in the last three months, a decline usually associated with recessions.
The worsening job climate is troubling because it could make consumers -- the main force keeping the economy going -- more cautious, economists say.
Reuters and the Associated Press contributed to this report.
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