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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Paul Kern who wrote (56725)	9/20/2006 2:55:53 PM
From: regli	Respond to of 116555

As expected, Fed keeps interest rate target unchanged usatoday.com Updated 9/20/2006 2:21 PM ET Staff and wire reports WASHINGTON — With the economy shifting into a slower gear and inflation apparently easing, Federal Reserve officials on Wednesday decided to keep interest rates where they are for now. The policymaking Federal Open Market Committee decided to leave its target for the federal funds rate — what banks charge each other for overnight loans — at 5.25%. That means the' prime lending rate that banks use as a base for millions of consumer and business loans, will stay at 8.25%, and many adjustable-rate loans will not have to adjust. WHAT THE FED SAID : Full text of Fed statement usatoday.com Fed Chairman Ben Bernanke and his colleagues believe a slowing economy and falling energy prices are starting to relieve inflation pressures. "There is no reason for them to change the stance of monetary policy," said David Wyss, chief economist at Standard & Poor's in New York. Before the Fed started raising rates in June 2004, the federal funds rate stood at a 46-year low 1% and the prime rate was at 4%. The Fed at its last meeting, Aug. 8, voted to leave rates unchanged after raising them 17 consecutive times over the past two years, the longest string of rate increases in Fed history. At the time, Fed officials stressed that they stand ready to raise rates again if there are signs inflation is flaring. Analysts are split on whether there will be at least one more rate increase before the end of the year. While global oil prices have fallen significantly from their highs above $78 a barrel, there are still worries. The Fed's favorite core price measure, the price index for personal spending, rose 2.4% the 12 months through July, and economists say the central bank will likely brandish the threat of higher rates until clearer signs emerge of inflation falling back toward their "comfort zone." Inflation concerns were heightened by a report earlier this month that productivity slowed in the spring at the same time that labor costs jumped 4.9% after an even bigger 9% rise in the first quarter. "There are incredibly divergent views about how things are going to unfold," said Mark Zandi, chief economist at Moody's Economy.com. Economists who believe the Fed is finished raising rates point to the drop in energy prices as a major factor that will help slow price pressures. That is already showing up in slower increases in consumer and wholesale inflation. Also helping to lower inflation pressures has been a big slowdown in housing after a five-year boom in which home sales soared to record highs, powered by the lowest mortgage rates in four decades. That situation has reversed this year, with sales of both new and existing homes falling. The government reported Tuesday that construction of new homes and apartments plunged in August to the slowest pace in more than three years. The slowdown in housing is also expected to keep inflation in check. The Fed's goal in raising interest rates has been to slow the economy enough to reduce inflation pressures, achieving a hoped-for "soft landing" — continued growth without inflaiton. "Falling energy prices, further weakening of the housing sector and a few tame inflation reports have put a lid on inflationary expectations for the time being," said Thomas McManus, an economist at Banc of America Securities. He said the fed funds rate is probably at its peak and will not be increased, a change of view from early July when he was predicting two more rate hikes. But David Jones, an economist at DMJ Advisors in Denver, said he believes the Fed will raise rates one more time, probably in October, before calling it quits. "My guess is that they will go up another quarter-point and then hold it there through the entire first half of next year," Jones said. "By this time next year, with growth slowing, the Fed could be easing." Whatever happens, analysts are not looking for interest rates to rise much from where they are now unless inflation gets out of hand and the Fed starts aggressively raising rates again. Mortgage rates actually have been falling in recent weeks, with the average 30-year mortgage down to 6.43% in the latest Freddie Mac survey, compared with a high this year of 6.8% in late July. Financial markets, where long-term rates are determined by supply and demand, have rallied in recent weeks on the belief that falling energy prices and a slowing economy will help to push inflation back down to the Fed's comfort zone.