Fed keeps interest rates steady
WASHINGTON — The Federal Reserve held interest rates steady Thursday, extending a yearlong breather for borrowers. Although policymakers observed improvements on inflation, they made clear they were not ready to declare victory on that front.
Wrapping up a two-day meeting, Fed Chairman Ben Bernanke and his central bank colleagues left an important interest rate at 5.25 percent, the same as it was last June. The decision was unanimous.
The Fed’s decision means that commercial banks’ prime interest rates — for certain credit cards, home equity lines of credit and other loans — should stay at 8.25 percent.
Before the Fed’s yearlong interest-rate pause, borrowers had endured two years of rate increases. The current period of level rates can help them regain their footing by paying down or consolidating debt.
Looking at economic conditions, Fed officials said readings on “core” inflation, which excludes energy and food prices, have gotten “modestly” better in recent months.
In noting this improvement, they abandoned language in previous statements that described underlying inflation as “somewhat elevated.”
Even so, Fed policymakers continued to identify the “predominate” risk to the economy as the failure for inflation to moderate as they now anticipate. “A sustained moderation in inflation pressures has yet to be convincingly demonstrated,” according to the statement.
Stocks traded erratically after the Fed’s announcement before Wall Street managed a modest gain.
On the sidelines for a year, the Fed does not want investors or consumers to think it is letting down its guard on inflation.
“The Federal Reserve remains on inflation watch,” said Lynn Reaser, chief economist at Bank of America’s Investment Strategies Group.
Inflation is bad for the economy and for the pocketbook. Out-of-control prices can eat away at paychecks, investments and standards of living. “And once expectations of higher inflation start take hold, it is very difficult to dislodge them,” Reaser explained.
Core inflation rose 2 percent over the 12 months ending in April. That compares with March’s 2.1 percent annual increase. Economists predicted underlying inflation should dip below 2 percent for the 12 months ending in May. That report was to be released Friday.
Gyrating energy prices are a wild card to the inflation outlook. Economists said there always is a risk that higher energy prices could affect other prices, which would boost underlying inflation.