WASHINGTON, Aug 12 - Federal Reserve policy-makers opted on Tuesday to keep U.S. interest rates at 45-year lows but again warned about the risks of falling prices and said rates could stay low for "a considerable period." The central bank's policy-setting Federal Open Market Committee left the bellwether federal funds rate for overnight loans between banks at 1 percent. That is a 1958 low hit after the Fed cut rates in June for a 13th time since early 2001 to try to foster more vigorous expansion. The Fed carefully couched its assessment of economic prospects, noting some signs of improvement but concluding risks were about equal for a pickup or a downturn, just as they were in June. "The evidence accumulated over the intermeeting period shows that spending is firming, although labor market indicators are mixed," it said.
Policy-makers repeated a small risk of an unwelcome fall in inflation exceeded chances of a sharp climb in prices and said their main concern "for the foreseeable future" was the potential for "undesirably low" inflation. "In these circumstances, the committee believes that policy accommodation can be maintained for a considerable period," the Fed said in a post-meeting statement that clearly stated it will do its best to keep credit cheap until growth perks up.
SPELL IT OUT
Analysts praised the Fed for being explicit about its policy intent, in contrast to the statement at the close of a two-day meeting on June 25 that created initial confusion about the extent of worry over falling prices. "The Fed sounded just the right note," said economist Parul Jain of Nomura Securities in New York. The Fed's steady-as-she-goes course heartened stock investors, fueling a 92.71-point surge in the Dow Jones industrial average to a close of 9,310.06. The high tech-heavy Nasdaq composite index added 25.50 to end at 1,687.01. Bonds weakened, though, with the 30-year U.S. Treasury bond price plunging 1-6/32 points, raising the yield to 5.53 percent, while the 10-year Treasury note price fell 18/32 of a point, raising the yield to 4.43 percent after the Fed erased any doubt it will keep short rates down. Wall Street appeared to get the message this time that rates will stay low -- and for a long time.
A poll of 21 primary bond dealers, conducted after the Fed decision was published, found 18 expected the next rate change will be up, sometime later next year or even in 2005. A minority group of three foresaw one more rate cut. The vote on Tuesday to keep rates unchanged was unanimous. Economist Anthony Chan of Banc One Investment Advisors said the Fed decision bolstered recovery hopes by indicating that policy-makers were prepared to nourish budding signs of growth with cheap credit as long as necessary. "The Fed's directive clearly provided some welcome relief as the Fed still believes that the economy is still not running away from us," Chan said, adding that financial markets "got themselves unnecessarily worried about a near or immediate tightening on the horizon."
WHERE'S THE JOBS?
The revival from the 2001 slump so far has been a jobless one, a politically painful fact for the Bush administration. U.S. payroll jobs have dropped more than 2 million since President George W. Bush took office in 2001. Fed Chairman Alan Greenspan and administration officials, including Treasury Secretary John Snow, have said the combined stimulus from low interest rates and sweeping tax cuts should leave the economy poised for stronger second-half growth. The Fed noted a pick-up in spending but was cautious about the job market outlook. "Business pricing power and increases in core consumer prices remain muted," it added. The central bank last cut rates at the close of its meeting on June 25, the sole reduction this year.
The nation's gross domestic product grew at a slim 1.4 percent annual rate in last year's final quarter and the first three months of this year, but sped up moderately to a 2.4 percent clip in the second quarter. Analysts say it will take sustained growth of 3.5 percent or more to begin to make a substantial dent in unemployment.//