Fed to retain low interest rates
WASHINGTON (AP) -Federal Reserve policy-makers decided to hold short-term interest rates at 40-year lows Wednesday amid a spotty recovery, a slide in the stock market and a drop in Americans’ confidence in the economy. For the fourth time this year, Federal Reserve Chairman Alan Greenspan and his Federal Open Market Committee colleagues left the federal funds rate – the interest that banks charge each other on overnight loans – at 1.75 percent, the lowest level in four decades.
The policy-makers, who slashed interest rates 11 times last year to rescue the economy from recession, have not changed the funds rate since December.
With rates at this low level, consumers might be motivated to spend more and businesses motivated to boost investment in new plants and equipment. Both are crucial ingredients in helping the economic recovery.
Economic growth is continuing to increase but strength in consumer and business demand appears to have moderated, the Fed said in a statement issued after a two-day meeting.
The policy-makers said they expect demand “to pick up over coming quarters … but the degree of the strengthening remains uncertain.”
The decision means the prime lending rate – a benchmark for many consumer and business loans – will remain at 4.75 percent, the lowest level since November 1965.
Economists offered a range of predictions about the Fed’s next step. But they were all worried about possible economic fallout and a crisis of confidence among investors, consumers and businesses related to the startling stream of accounting scandals. The latest one involving telecommunications giant WorldCom rocked financial markets Wednesday.
On Wall Street, the Dow Jones industrial average, which had fallen as much as 200.25 points, managed a late rebound. The index closed down just 6.71 points, at 9,120.11. The Dow had dropped 155 points Tuesday, its fourth triple-digit loss in five sessions.
The accounting scandals and worries about jobs helped to push Americans’ confidence in the economy down in June to a four-month low.
Against this backdrop, some economists said they would no longer rule out the possibility of Fed rate cuts in coming months.
“That’s certainly back on the table,” said Mark Zandi, chief economist with Economy.com. “Major swings in stock prices – one way or the other – affect the economy, and I think we are in one such period. The risks are high,” he said. “The economy is growing – but slowly – and it may not take much to derail it.”
Still, economists think there is a greater likelihood of a rate boost – not cuts – later this year, possibly as early as September, on the belief that the recovery will be on stronger footing then. Yet others predict it may leave rates alone for the rest of the year. Most economists believe the Fed will make no changes at its next meeting, Aug. 13.
Recent economic reports confirm the recovery is slowing. Some economists suggest economic growth, as measured by the gross domestic product, will measure around 2.5 percent in the current quarter or lower, down from the brisk 5.6 percent pace posted in the year’s first three months.
On the retail front, shoppers have shown less vigor recently. But Americans’ appetites for homes has remained healthy thanks to low mortgage rates. New-home sales shot up 8.1 percent in May to a seasonally adjusted annual rate of 1.03 million, a record, the Commerce Department reported Wednesday.
Consumer spending accounts for two-thirds of all economic activity in the United States, and their willingness to keep their pocketbooks and wallets open in coming months will play a big role in the economic recovery’s vitality.
Economists fear a sluggish jobs market and expectations that the nation’s unemployment rate – now at 5.8 percent – could rise as high as 6.5 percent by the fall could dampen consumer spending.
Manufacturing, knocked down by the recession, is back on its feet but isn’t going gangbusters. Orders to U.S. factories for big-ticket items rose a solid 0.6 percent in May, another Commerce Department report showed.
Capital spending by businesses has yet to turn around, which means a key component to a sustained recovery is lacking, economists said. Deep cuts in spending on new plants and equipment helped push the economy into recession last year.
“I think the Fed wants to see concrete evidence of a pickup in spending by consumers and companies before they make changes to rates,” said Lynn Reaser, chief economist at Banc of America Capital Management.
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