Fed again stands pat on key rate

October 26, 2006|By Molly Hennessy-Fiske | Molly Hennessy-Fiske,Los Angeles Times

The Federal Reserve left its benchmark short-term interest rate unchanged yesterday at 5.25 percent for the third consecutive meeting but said economic growth is expected to pick up, leaving open the possibility of further rate increases.

Echoing its two previous post-meeting statements, the Fed's policymaking Federal Open Market Committee acknowledged that "inflation pressures seem likely to moderate over time" because of lower oil prices and previous rate boosts.

Although inflation risks remain, "going forward, the economy seems likely to expand at a moderate pace," the Fed said.

Because of renewed consumer confidence, the economy could speed up enough by early next year to prompt another Fed rate increase, many economists say.

Renewed consumer optimism stems not only from falling gasoline prices and less-threatening inflation. Also helping are low unemployment, robust hiring, a rebounding stock market and a national housing slowdown that has been less severe than expected.

That could give new life to an economy that has been slowing. Many analysts expect the government to report tomorrow that third-quarter growth slowed to 2.1 percent, the lowest since the Gulf Coast hurricanes last year and down from 2.6 percent in the second quarter.

No rate increases are expected soon. Fed Chairman Ben S. Bernanke has vowed to fight inflation, which is still troubling. Core consumer prices, excluding food and energy, are up 2.9 percent compared with this time last year and up 3.4 percent for the year, higher than the Fed prefers.

Many analysts expect the Fed to hold the short-term interest at 5.25 percent until the middle of next year as it waits for the delayed effects of its 17 previous rates increases to bring the economy to a comfortable 3 percent growth rate, with inflation of 1 percent to 2 percent.

Some analysts say inflation fears are easing. Consumer prices fell 0.5 percent in September, the biggest drop in 10 months, as average gasoline prices dropped to $2.23 a gallon from $3 last summer, according to the Department of Energy.

As prices fall, consumers' pay is growing. As of September, inflation-adjusted average weekly earnings were up 2.2 percent for the year, noted Bernard Baumohl, executive director of the Economic Outlook Group in Princeton Junction, N.J.

Analysts are waiting to see whether higher consumer confidence translates into more sales.

Retail sales, excluding gasoline, were up 0.6 percent in September, driven by clothing and department store sales. But holiday sales are expected to grow 3 percent in November and December, down from 3.6 percent last year.

Molly Hennessy-Fiske writes for the Los Angeles Times.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.