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Fed Keeps Rates Pat

Tuesday, 07 May 2002 12:00 AM

Policy-makers of the Federal Open Market Committee voted unanimously to keep the key federal funds target rate unchanged at 1.75 percent. It was the third consecutive meeting the FOMC decided to keep monetary policy steady.

"Economic activity has been receiving considerable upward impetus from a marked swing in inventory investment," the Fed stated in announcing its latest decision.

The central bank did, however, caution some downside risks.

"The degree of the strengthening in final demand over coming quarters, an essential element in sustained economic expansion, is still uncertain," it said.

But ultimately, the risks of the economy slipping further or conversely, inflation picking up once again are in equilibrium.

"For the foreseeable future, against the background of its long run goals of price stability and sustainable economic growth and of the information currently available, the risks are balanced with respect to the prospects for both goals," it concluded.

The Fed's decision to key interest rates steady was in line with Wall Street's expectations, despite the seemingly rapid turnaround in the domestic economy in recent months.

At first blush, the economy appears to have rapidly rebounded from a year of sluggish growth. The Commerce Department had reported last month that the first quarter's growth rate had picked up to a whopping 5.8 percent, after tepid growth of 1.7 percent the previous quarter. Still, even President Bush was quick to point out after the release of the latest GDP figures that economic recovery remained fragile.

For one, inventory clearance was the biggest booster for growth during the first three months of this year, with consumers taking advantage of the deep discounts offered by many manufacturers, which often resulted in a loss for them, such as zero-percent interest financing by automakers. As such, many analysts fear that consumer spending, the driving force in GDP expansion, will run out of steam during this quarter.

Indeed, given the fragility of the rebound from a mild recession, Federal Reserve Chairman told members of the Joint Economic Committee on April 17 that the Fed could afford to wait until the economic recovery is entrenched before raising interest rates. He asserted that inflation was likely to stay low for some time.

"Prospects for low inflation and inflation expectations in the period ahead mean that the Federal Reserve should have ample opportunity to keep inflation pressures contained once sustained, solid economic expansion is in view," Greenspan said.

Meanwhile, consumers are likely to be increasingly concerned about the job market, particularly as the Labor Department reported Friday that the

The broader consensus remains that the U.S. economy will continue to pick up steadily, and the Fed will have to raise interest rates once again by the second half of this year.

Greenspan himself suggested as much last month, when he told congressmen that this level of the funds rate "is not likely to be consistent with maintaining price stability" in the future, implying the Fed will eventually have to raise the rate.

It has, however, been some time since the central bank was forced to take the punch bowl away from the economic boom, given that the Fed's principle concern since the end of 2000 was to prevent the economy from falling flat.

The Fed has slashed the fed funds rate from 6.5 percent level at the beginning of 2001 to 1.75 percent, its lowest level since July 1961, in an attempt to keep the economy afloat. Three of the rate cuts were made after the devastating Sept. 11 terror attacks.

The FOMC will hold its next meeting June 25-26. Copyright 2002 by United Press International.

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Policy-makers of the Federal Open Market Committee voted unanimously to keep the key federal funds target rate unchanged at 1.75 percent. It was the third consecutive meeting the FOMC decided to keep monetary policy steady. Economic activity has been receiving...
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Tuesday, 07 May 2002 12:00 AM
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