Fed leaves key rate unchanged at 1.75%

Central bank also keeps policy stance at neutral

May 08, 2002|By NEW YORK TIMES NEWS SERVICE

The Federal Reserve's policy-makers voted yesterday to leave short-term interest rates unchanged, and the Fed suggested that it did not expect to alter that stance for some time.

In a statement, the Fed said its Open-Market Committee voted unanimously to leave the benchmark federal funds rate on overnight loans between banks at 1.75 percent, the lowest in more than four decades.

The central bank's decision was expected because of concerns about the strength of the economic recovery.

Reaction to the news in financial markets was muted. The Dow Jones industrial average closed the day with a gain of 28.51 points, at 9,836.51, and the Nasdaq composite index slipped 4.66 to 1,573.82. Bond prices were little changed in the credit markets.

The Fed acted against a backdrop of ambiguous economic data.

On the one hand, growth in the first quarter was a robust 5.8 percent, the clearest sign yet that the recession is over. But much of that increase was attributable to a sharp slowdown in inventory liquidation from the fourth quarter and to home construction, which because of record warmth during the winter was very strong. It is unlikely that either sector of the economy will continue to be as significant a contributor to growth.

In its statement, the Federal Open Market Committee noted that "economic activity has been receiving considerable upward impetus from a marked swing in inventory investment."

As a consequence, most economic forecasters expect the pace of the recovery to moderate in the current quarter.

Reflecting the nascent recovery, Alan Greenspan, the Fed's chairman, told Congress last month that the central bank was unlikely to alter its monetary policy position until it saw that the economy was on a "sustained" growth path. At that time, Greenspan suggested that it would be some months before those signs were likely to emerge.

The Fed noted yesterday that "the degree of the strengthening in final demand in coming quarters, an essential element in sustained economic expansion, is still uncertain." Some analysts have argued that the Fed might not need to raise interest rates even after the economy gains more stable footing, because inflationary pressures appear to be virtually nonexistent.

In the eyes of those who advocate that position, yesterday's report on productivity, which showed that output per worker rose at its highest rate in nearly 20 years during the first quarter, underscores that argument.

The Fed said the risks of sustainable economic growth and maintaining price stability are balanced "for the foreseeable future." That suggests that its current neutral stance on monetary policy will continue for some time.

The Fed cut short-term rates 11 times last year to deal with a weakening economy and the economic fallout from the terrorist attacks of Sept. 11.

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