Fed Leaves Interest Rates Alone Wall Street Applauds Decision Not To Boost Rates

The Federal Reserve passed up a chance to raise interest rates on Tuesday amid signs that the sizzling economy was slowing to a more moderate pace. The stock market rose in response.

But borrowers may not be so lucky in July. Many economists believe that by the next meeting of the central bank’s interest-setting panel, Fed officials will feel the need to take out more insurance against inflation by nudging rates up again.

The Fed announced at the end of a 4-1/2-hour meeting that there would be no change in interest rates.

Financial markets rallied on the news with the Dow Jones industrial average gaining 74.58 to close at 7,303.46, just 30 points shy of its all-time high set last Thursday. Rising demand for bonds pushed the yield on the 30-year Treasury down to 6.90 percent.

The reaction was quite different on March 25 when the Fed announced its first rate increase in two years, pushing its target for the federal funds rate, the interest that banks charge on overnight loans, up a quarter point to 5.5 percent.

In the weeks following that move, stocks lost 9.8 percent of their value as investors feared a series of rate increases would be needed to slow the economy to a more sustainable pace.

However, stocks have now recouped those losses as evidence mounted that the 5.6 percent economic growth rate of the first quarter was slowing to a more sustainable pace.

And while unemployment fell to a 23-year low of 4.9 percent in April, the tight labor market has not pushed up inflationary pressures.

In fact, the government reported last week that wholesale prices fell for a fourth straight month and inflation at the consumer level is running at just 1.5 percent so far this year, less than half the pace of 1996.

“What the Fed saw was a significant slowdown in the economy and no immediate threat of inflation. That is why they decided to wait,” said economist Lyle Gramley, a former Fed governor.