The Fed Leaves Key Interest Rate Unchanged

That decision marks at least a temporary pause in what had been the longest unbroken stretch of Fed rate increases in recent history — 17 in a row. It's the first time in more than two years that the Fed met and did not raise rates.

MICHELE NORRIS, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Michele Norris.

MELISSA BLOCK, host:

And I'm Melissa Block.

Today, the Federal Reserve did something that it hasn't done for quite awhile. It took a break from raising interest rates. The Fed's Open Markets Committee decided to leave rates where they are for the time being. In its statement, the Fed says it remains concerned about inflation risks, but it also sees signs that economic growth is cooling off.

As NPR's Jim Zarroli reports, the decision was not unanimous and investors appear worried that more rate hikes could come later in the year.

JIM ZARROLI reporting:

The decision to leave the federal funds rate at 5.25 percent puts an end to a long period of gradual rate tightening that got underway in June 2004. Over the past two years, the U.S. economy has enjoyed strong growth and a relatively low unemployment rate, and Fed officials worry that inflation pressures could grow out of control.

Now, Fed officials have decided to take a pause, says Diane Swonk, chief economist at Mesirow Financial.

Ms. DIANE SWONK (Mesirow Financial): Bottom line is, 17 increases in a row with an economy that's slowing, although inflation has been picking up, they haven't had time to see whether or not what they put into the system is actually working yet.

ZARROLI: That is, it takes awhile for rate increases to have an impact. And whether the tightening has done the job so far is unclear. In a statement released after today's meeting, Fed officials sounded like they were still more than a little worried about price pressures.

Readings on core inflation have been elevated in recent months, the statement said. It also referred to high levels of resource utilization and rising energy prices. Oil prices are once again nearing record levels this week, and that can have a notorious effect on inflation.

But Mark Vitner, senior economist at Wachovia Corporation, says the economy has also shown clear signs of slowing. He points to the 2.5 percent annual rise in the nation's gross domestic product during the second quarter of this year, well below the preceding quarter.

Mr. MARK VITNER (Wachovia Corporation): Back at the last FOMC meeting, the Fed had noted that economic growth was moderating. Today they say economic growth has moderated and the slowdown is here. The Fed is getting exactly what they sought, which is more modest economic growth.

ZARROLI: And Vitner says that with the economy cooling down, inflation pressures will probably ease even more in the months to come.

Mr. VITNER: The risk seems to be somewhat to the downside. The housing market is cooling off and it may be cooling off more than people realize, because we're seeing a lot of contract defaults by folks that have bought new homes and have thought again and said, you know something? I don't want to go through with this purchase.

ZARROLI: Likewise, the nation's job market has turned in a weaker than expected performance. During July, the number of jobs created was a disappointing 113,000, and the unemployment rate rose from 4.6 to 4.8 percent. Diane Swonk of Mesirow Financial notes that consumers are beginning to spend less. Swonk says given this mixed picture, the Fed's decision today makes sense.

Ms. SWONK: It certainly is a prudent thing to do, given some of the other uncertainties we face out there, gasoline at the pump skyrocketing but wages not.

ZARROLI: This somewhat muddied picture of the economy right now was reflected in the Fed's vote. One of those voting, Jeffrey Lacker of the Richmond Federal Reserve Bank, dissented. According to today's statement, Lacker had preferred another rate hike. Dissents aren't unheard of at the Fed, but economists say they tend to happen during turning points, when the direction of the economy is unclear.

Likewise, investors didn't seem to know what to make of the decision. Right after it was announced, stock prices roses. But then they fell back again and finished the day largely down. Bond prices were also down by the end of the afternoon.

Jim Zarroli, NPR News, New York.

Copyright © 2006 NPR. All rights reserved. Visit our website terms of use and permissions pages at www.npr.org for further information.

NPR transcripts are created on a rush deadline by a contractor for NPR, and accuracy and availability may vary. This text may not be in its final form and may be updated or revised in the future. Please be aware that the authoritative record of NPR’s programming is the audio.

Comments

 

Please keep your community civil. All comments must follow the NPR.org Community rules and terms of use, and will be moderated prior to posting. NPR reserves the right to use the comments we receive, in whole or in part, and to use the commenter's name and location, in any medium. See also the Terms of Use, Privacy Policy and Community FAQ.