Federal Reserve Board holds rates steady
WASHINGTON (AP) -The Federal Reserve left a key interest rate unchanged at a 41-year low Tuesday, giving consumers and businesses more time to take advantage of rock-bottom borrowing costs to help the economy snap out of its listless state. At their last meeting of this year, Fed Chairman Alan Greenspan and his Federal Open Market Committee colleagues opted to hold the federal funds rate steady at 1.25 percent. The funds rate is the interest that banks charge each other on overnight loans and is the Fed’s main lever for influencing the economy.
The vote was 12-0.
The Fed, in its statement, said that currently low rates are “providing important ongoing support to economic activity.”
The “limited number of incoming economic indicators since the November meeting, taken together, are not inconsistent with the economy working its way through its current soft spot,” the Fed added.
The Fed’s first rate cut this year and the 12th since January 2001 came at the central bank’s previous meeting, Nov. 6. That bold, half-point reduction pushed the funds rate down to 1.25 percent, a 41-year low. In response, some commercial banks lowered their prime lending rate by a similar half-point to 4.25 percent, the lowest rate since May 1959.
The Fed’s decision on Tuesday comes amid a stagnant job market, a bumpy stock market and an overhaul of President Bush’s economic team. That shake-up is designed to control political damage from the sputtering economy, a sore spot for the president as he gears up for re-election in 2004.
Leaving borrowing costs low might motivate consumers, the economy’s lifeblood, to keep spending and might encourage businesses to increase investment, economists say. That would provide a helping hand to an economy that analysts believe will grow tepidly this quarter and in the first quarter of 2003 but will not slide into a new recession.
“I think the Fed policy-makers feel that they have really done enough to try and restore the economic recovery and over time their policy will allow growth to return it its full potential,” said Carl Tannenbaum, chief economist of LaSalle Bank.
He and other economists believe the Fed will probably hold interest rate steady in the coming months, barring an unforeseen shock to the economy.
On Wall Street, the Dow Jones industrial average was up 40 points and the Nasdaq gained 20 in afternoon trading.
Knocked down by last year’s recession, the economy has experienced an uneven recovery this year. The seesawing economic growth – a below-par 1.3 percent pace in the second quarter, rising to a brisk 4 percent rate in the third quarter – troubles the Bush administration, Fed policy-makers, Wall Street and Main Street.
The manufacturing sector’s comeback trail has hit a pothole. But consumers have been keeping their pocketbooks and wallets sufficiently open to prevent the recovery from fizzling. And low-mortgage rates are expected to power home sales to new records this year.
New claims for jobless benefits recently hit a 21-month low, suggesting layoffs are slowing. Yet the nation’s unemployment rate jumped to 6 percent in November matching April’s figure, which was the highest rate in eight years. The number of unemployed people rose to 8.5 million in November, up from 8.2 million the previous month.
The higher unemployment rate is fresh evidence that companies, worried about a possible war with Iraq, the stock market and battered profits, are reluctant to make big commitments in hiring and capital investment, thus restraining the recovery.
Were the economy to show new signs of stumbling, some economists said they wouldn’t rule out an interest rate reduction at the Fed’s first scheduled meeting of 2003, on Jan. 28 and 29. Economists also believe Congress is likely to pass an economic stimulus package next year, taking some pressure off the Fed to reduce rates.
If the economy picks up momentum next spring, as some analysts predict, and that continues to build, economists said the Fed might raise rates late next year.
Economists predict a winter lull. Many think the economy is growing at only a 1.4 percent rate this quarter and they foresee a lackluster 2.5 percent growth rate in the first quarter of 2003.
Given that, economists think the jobless rate could hover around 6 percent in coming months, a potential problem for Bush’s 2004 re-election campaign. Economists don’t foresee the unemployment rate moving down on a continued basis until late next year.
On Tuesday, Bush chose investment banker William H. Donaldson to replace Harvey Pitt as chief of the Securities and Exchange Commission.
And, on Monday, the president tapped John W. Snow, chairman of the transportation and railroad conglomerate CSX Corp., to be treasury secretary. On Friday, Treasury Secretary Paul O’Neill and White House economic adviser Larry Lindsey were fired.
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