Fed Leaves Interest Rate Unchanged

Federal Reserve officials opted Tuesday to hold short-term interest rates steady in the face of data showing healthy but not excessive economic growth and little inflation.

The central bank announced it had adjourned a three-hour, 45-minute closed-door meeting of its policy-making committee without changing the benchmark rate on overnight loans between banks.

It has been at 5.5 percent since March, when the Fed bumped it up by a quarter percentage point to curb potential excess demand viewed as inflationary.

An increase Tuesday would have slowed the economy by raising borrowing costs for millions of American consumers and businesses.

The decision for no change has been widely anticipated and, the day before, the Dow Jones average of industrial stocks had moved to a six-week high. It lost some ground after the Fed’s announcement, closing at 7,945.26, down 46.17.

Early this year, monetary policy-makers were alarmed by torrid 4.9 percent economic growth in the first quarter. It abated to 3.3 percent in the second quarter and, in the view of many economists, will slip under 3 percent in the second half of next year. But with unemployment under 5 percent for the first time in 24 years, that’s still too fast for the comfort of some.

Nevertheless, inflation has improved. Consumer prices - excluding volatile food and energy costs - have risen at a scant 2.2 percent annual rate so far this year, down from 2.6 percent last year and the best since 1965.

“They have really no inflation to point to. We have a healthy economy with little or no inflation. The Federal Reserve would have difficulty explaining to the public and to Congress why they raised interest rates under those circumstances,” said economist Sung Won Sohn of Norwest Corp. in Minneapolis.

Economic data reported Tuesday did little to alter economists’ views.

Consumer confidence edged higher in September, buoyed by low unemployment and low inflation, said the Conference Board, a business research group in New York. That bodes well for the all important Christmas shopping season.

However, new home sales fell 2.2 percent in August to a seasonally adjusted annual rate of 800,000, the Commerce Department said. Declines in the West and Midwest overpowered gains in the South and Northeast.

But the drop came after two increases. And sales for the first eight months of the year still are running 6 percent ahead of the same period of last year, which turned out to register the strongest sales in 18 years.

Also, in the earliest take on how the economy behaved in September, a Chicago manufacturing group said factory activity increased at a slower pace in the Midwest.

The future course of interest rates depends on whether economic growth moderates enough to avoid increasing strain on factory capacity and the labor supply, two factors crucial to whether inflation accelerates.

Some economists predict a small increase could come as soon as the Fed’s Nov. 12 or Dec. 16 meetings. But Bruce Steinberg of Merrill Lynch in New York said the Fed may leave rates alone until its meeting in early February.

“The U.S. economy is capable of growing a lot faster than once believed without generating inflation,” he said.