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Fed Keeps Key Interest Rate at 45-Year Low

The panel, continuing support for a tentative recovery, says the cost of short-term loans could remain down for a 'considerable period.'

October 29, 2003|Jonathan Peterson | Times Staff Writer

WASHINGTON — The Federal Reserve decided Tuesday to keep a key short-term interest rate at a 45-year low of 1% in a bid to provide what it called "important ongoing support" to a strengthening economy.

The unanimous decision by the Federal Open Market Committee to leave rates unchanged was widely expected. It underscored the Fed's reluctance to impede an economy whose recovery still appears tentative.

In a brief statement, Fed policymakers stuck to the tone of their prior two meetings, declaring that the current, low level of short-term rates "can be maintained for a considerable period."

Observers said the Fed wanted to tamp down growing expectations in the financial markets that, in light of stronger economic growth, rates might go up early next year.

The tool the Fed used was the federal funds rate, which banks charge one another for overnight loans.

"The message is: Get a grip," said James Glassman, a senior economist at J.P. Morgan Chase & Co. in New York. "We're going to be patient. It's a little early to think about the Fed raising rates."

The message pleased financial markets. The Dow Jones industrial average finished the day up 140.15 points at 9,748.31.

In its statement, the Fed said it had seen evidence since its Sept. 16 meeting that suggested the economy was getting stronger. At the same time, the financial policymakers suggested that healthy economic growth was not a sure bet, and pointed to the unlikely possibility that inflation -- running at about 1% -- could slip markedly.

"The evidence ... confirms that spending is firming, and the labor market appears to be stabilizing," the Fed statement said. "Business pricing power and increases in core consumer prices remain muted."

Fed officials said the odds of slower growth and faster growth "are roughly equal," and described undesirably low inflation as "the predominant concern for the foreseeable future."

The Fed announcement comes amid growing belief that the U.S. economy is gaining strength, and concern in some quarters that such strength could reintroduce inflationary pressures.

As the Fed was holding the line on rates, the Conference Board reported a jump in its consumer confidence index to 81.1 in October from 77 in September, lifting the barometer to slightly above its reading in April.

"With the holiday season around the corner, this improvement in consumers' spirits is a good omen for upcoming retail sales," Lynn Franco, director of the Conference Board's Consumer Research Center, said in a statement.

Also Tuesday, the Commerce Department reported that orders for big-ticket items, known as durable goods, rose 0.8% in September after a slight decline dip in August.

This month, the Labor Department reported that nonfarm payrolls expanded by 57,000 jobs in September -- a modest number and the first such gain since January.

The economy, which grew at sluggish rates in late 2002 and early 2003, expanded at a stronger 3.3% in the second quarter of this year. Analysts believe the third-quarter figure, due to be released Thursday, was as high as 6%.

Given such signs, some economists are starting to worry that the reemergence of at least some inflation is only a matter of time, and contend that Fed officials should be acting more forcefully to restrain it.

"I would argue that right now they are on the cusp of creating a serious problem with inflation down the road," said Brian S. Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc., a Chicago investment bank.

Although the Fed did not need to raise interest rates Tuesday, Wesbury said, officials should have signaled that such hikes could be on the horizon: "They need to nip building inflationary pressures in the bud," he said.

But with the labor market far from buoyant, others maintain that it would be the wrong time for the Fed to clamp down on growth with higher interest rates.

By promising for the third straight time to keep short-term rates low for a "considerable period" and pointing to the risks of inflation falling much below 1%, the Fed on Tuesday sought to allay such concerns.

"This is a way of saying, 'Look, we're serious when we say we're here for a considerable period of time,' " Glassman of J.P. Morgan Chase said.

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