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Fed Holds Line on Rate Boosts--for Now

Economy: Panel says it will watch employment picture and energy prices closely for signs of inflation.

October 04, 2000|From Reuters

WASHINGTON — The Federal Reserve kept key U.S. interest rates steady Tuesday but warned that the nation's tight job market and rising energy prices still risked pushing up inflation, leaving the door open for renewed rate increases.

Extending a cease-fire of more than 4 1/2 months in its battle against economic overheating, the U.S. central bank's rate-setting Federal Open Market Committee followed market expectations and kept the federal funds overnight bank lending rate at 6.5%.

The rate, which determines the cost of credit throughout the world's biggest economy and far beyond, has been at that level since an unusually large increase of half a percentage point in May.

The more symbolic discount rate on direct Fed loans to commercial banks remains at 6.0%.

In its statement after the meeting, the Fed said it still saw risks in the economy as skewed toward "heightened inflation pressures in the future," signaling that it may yet raise credit costs to keep the record U.S. economic expansion on track.

The rate-setting committee--the Fed's five current board members and five of the regional Fed presidents, who vote on a rotating basis--next meets on Nov. 15 amid expectations it will once again vote to not touch borrowing costs.

While reiterating its now-standard warning about inflation, the powerful central bank also provided a distinctly upbeat assessment of the long-awaited slowdown in the almost $10-trillion U.S. economy.

At the same time, the Fed tempered its positive stance with a warning about dangers posed by the nation's tight labor market--the jobless rate continues to hover near its lowest level in a generation--and a sharp rise in energy prices.

Fed officials have long argued that the mere expectation of higher prices in the future can cause actual prices to rise.

Crude oil prices have recently raced to their highest level in a decade, prompting fears of runaway inflation and a possible slowdown in growth as consumers spend more on energy. But economists have speculated that such dangers are still too remote to influence Fed policy immediately.

"The Fed feels a little better about the economy's ability to grow faster without generating inflation," said Jeff Palma, an economist at UBS Warburg in Stamford, Conn. "The Fed is going to keep this stance as long as growth remains this strong and there are upside risks to the inflation outlook."

The Fed's decision comes against the backdrop of data in recent weeks suggesting that the booming U.S. economy has slowed to a pace that is more moderate and less prone to inflation.

The latest evidence of slowing came just hours before the Fed announced its decision, when the Commerce Department said sales of new homes fell 3% in August.

Separately, the Conference Board in New York said its index of leading indicators--designed to predict economic activity three to six months down the road--weakened for a second straight month in August.

But Fed watchers said these indications of slower growth were unlikely to prompt the Fed to let its guard down.

Tuesday's meeting was the final one before the U.S. presidential election in November.

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