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Despite concerns, Fed takes no action on interest rates

Inflation remains the top risk to the economy, policymakers say.

June 29, 2007|From the Associated Press

WASHINGTON — The Federal Reserve held interest rates steady Thursday, extending a yearlong breather for borrowers. Although policymakers observed improvements on inflation, they made it clear they were not ready to declare victory on that front.

Wrapping up a two-day meeting, Fed Chairman Ben S. Bernanke and his central bank colleagues left an important interest rate at 5.25%, unchanged since 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%.

Before the Fed's 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, had eased "modestly" 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 "predominant" risk to the economy as inflation's failure to moderate as they anticipated. "A sustained moderation in inflation pressures has yet to be convincingly demonstrated," they said.

On the sidelines for eight straight meetings, 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 can eat away at paychecks, investments and standards of living. "And once expectations of higher inflation start to take hold, it is very difficult to dislodge them," Reaser said.

Core inflation rose 2% over the 12 months that ended in April. That compares with March's 2.1% annual increase. Economists predicted that underlying inflation would slip below 2% for the 12 months that ended in May. That report was to be released today.

Gyrating energy prices are a wild card for the inflation outlook. Economists said there was always a risk that higher energy prices would affect other prices, boosting underlying inflation.

The Fed once again said future rate moves would hinge on what incoming data say about inflation and economic growth. Many economists believe that the Fed will keep rates steady at its Aug. 7 meeting and probably through the year.

Fed policymakers upgraded their assessment of the economy's performance. They said growth appeared to have been moderate in the first half of the year despite the housing slump. In their previous assessment, in early May, Fed officials said growth had slowed in the early part of the year.

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The central bank's statement

Here is the text of the Federal Reserve's statement on interest rates:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5 1/4 %.

Economic growth appears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector. The economy seems likely to continue to expand at a moderate pace over coming quarters.

Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.

In these circumstances, the committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

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