Fed Leaves Rates Alone
Federal Reserve policy-makers were content to leave interest rates unchanged Tuesday, apparently deciding that new-found strength in housing and manufacturing does not threaten to ignite inflation.
The decision, which had been widely expected, means that borrowing costs for millions of consumers and businesses who have loans linked to Fed rates will stay steady as well.
The Fed’s action was announced in a brief statement at the conclusion of 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 review interest rate policies.
The central bank last changed interest rates on Jan. 31 when it reduced its target for the federal funds rate, the interest that banks charge each other, by a quarter-point down to 5.25 percent.
The Fed’s decision had little immediate impact on financial markets, where it had been anticipated.
Yields on 30-year Treasury bonds, which had risen to 6.66 percent before the Fed’s announcement, remained at that level, up from 6.62 percent late Monday. The Dow Jones industrial average was up about 30 points before the announcement and dipped slightly in the following minutes.
Just before today’s meeting got under way, the Commerce Department reported that builders boosted housing construction in November at the fastest rate in 16 months.
The 9.2 percent gain in housing starts, the best since July 1995, sent interest rates shooting higher in the inflation-sensitive bond market. Yields on 30-year Treasury bonds rose to 6.68 percent in trading today, up from 6.62 percent late Monday.
But private economists said the November gain overstated the strength in housing. They also played down a 0.9 percent jump in factory production reported Monday, saying more than half of that increase reflected a rebound after strikes disrupted October production.
“We still have very moderate growth and low inflation,” said Sung Won Sohn, chief economist at Norwest Bank in Minneapolis.
Most economists believe the central bank’s next move will be to increase rates slightly to make sure faster growth doesn’t trigger higher inflation. The best guess is that a rate hike could occur either in late spring or early summer.
However, some analysts said if the current Christmas sales season proves to be disappointing and the economy weakens further, the next Fed move could well be a cut in rates.
“Things are getting weaker than we thought they would,” said David Wyss, chief financial economist at DRI-McGraw Hill Inc. of Lexington, Mass. “It is quite possible if this slowness continues, you will see the Fed ease next year.”
Last January’s rate cut was the third in a series of quarter-point reductions aimed at spurring an economy that looked uncertain.