Fed Stands Pat On Rates As Expected, Central Bank Opts To Leave Interest Rates Unchanged

The Federal Reserve passed up a chance Tuesday to lower interest rates for a second time this year amid signs that the economy is pulling out of its springtime stall.

After meeting for more than three hours behind closed doors, the central bank issued a brief statement signaling that it had made no change in short-term interest rates. The federal funds rate, the interest that banks charge each other, remained at 5.75 percent.

The action came at a meeting of the Federal Open Market Committee, the group of Fed board members and regional bank presidents who meet eight times a year to set interest-rate policies.

At the panel’s last meeting July 6, the Fed cut the funds rate for the first time in nearly three years. The small, quarter-point reduction from 6 percent sparked a big rally on Wall Street as investors believed the central bank would ride to the rescue of the faltering economy with a string of rate cuts.

However, since that time the economy has shown signs of reviving on its own. For that reason, it had been widely expected that the central bank would make no change in August, preferring to see more economic data before moving again.

Financial markets generally took Tuesday’s inaction in stride. The Dow Jones industrial average held onto small gains after the midafternoon announcement, ending the day up 5.64 points at 4,620.42.

Because of the economy’s new-found strength, economists who had once believed that rates would be trimmed three or more times this year, now are looking for perhaps only one more small rate reduction of a quarter point, leaving the funds rate at 5.5 percent at the end of this year.

That would be a disappointment for millions of business and consumer borrowers who had hoped that they would get more rate relief on home-equity and other loans tied to commercial banks’ prime lending rate.

“In our opinion, the Fed has at least one more easing to go,” said Bruce Steinberg, economist at Merrill Lynch in New York, predicting that the cut could come as early as the next Open Market Committee meeting Sept. 26.

Critics complained that Federal Reserve Chairman Alan Greenspan and his colleagues had driven rates too high last year in fighting a non-existent inflation threat and are now being too slow to lower rates.

“By not taking any action, the Federal Reserve missed an opportunity to achieve higher growth,” said Michael Baroody, vice president of the National Association of Manufacturers.

“A further cut in interest rates would have brought the economy out of its current slowdown more rapidly and set the stage for a resumption of stable growth by the end of the year.”

While Greenspan had publicly fretted about a possible recession in June, by late July he was telling Congress the economy had passed the point of “maximum risk” of a downturn.

Martin Regalia, chief economist of the U.S. Chamber of Commerce, said he wouldn’t be surprised if the Fed stays on the sidelines for the rest of the year.

“They are going to be very hesitant about gunning economic activity to the point where they would have to come back and reverse policy and start raising interest rates again. That would create a political problem for Mr. Greenspan, who is seeking renomination,” Regalia said.

Greenspan’s term as Fed chairman expires in March and there are wide expectations that Clinton will nominate him for a third four-year term.

But Robert Dederick, economic consultant at Northern Trust Co. in Chicago, said he believed the central bank would trim rates again, especially if the Republican Congress and the Clinton White House can agree on a significant package of deficit cuts this fall.

“If something is done on the budgetary side, then the Fed would have the justification of offsetting that economic drag with lower interest rates,” he said.