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US Fed holds rates steady

The Federal Reserve halts a more than two-year string of interest-rate rises, holding its benchmark rate steady.

india Updated: Aug 09, 2006 16:13 IST

The US Federal Reserve on Tuesday halted a more than two-year string of interest-rate rises, holding its benchmark rate steady while it gauges whether a slowing economy will keep inflation in check.

If not, the Fed indicated it will resume raising rates.

The central bank's policy-setting Federal Open Market Committee voted 9-1 to keep the federal funds rate target at 5.25 percent, pausing a cycle that had taken the rate steadily higher in 17 successive hikes since mid-2004.

Richmond Fed Bank President Jeffrey Lacker dissented, preferring a quarter percentage point increase but the Fed provided no reason why Lacker voted as he did.

Stocks weakened as investors saw the Fed action confirming a weakening economy. The Dow Jones industrial average lost 45.79 points to end at 11,173.59 while the high tech-laden Nasdaq Composite Index dropped 11.65 to 2,060.85.

Prices for debt securities moved only modestly, since the Fed decision was anticipated, and were mixed. The 30-year US Treasury bond shed 8/32 in price and yielded 5.02 percent while the bellwether 10-year Treasury note was unchanged.

Recent economic indicators have pointed to a downshift in the economy, led by a cooling housing market, but wages and prices continue to rise, and the Fed made clear its optimism about inflation was wary and conditional.

"Inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand," the Fed said in a statement after the meeting.

Still See Risks

"Nonetheless, the committee judges that some inflation risks remain," the central bank added, saying any further rate moves would depend on the outlook for prices and growth.

While the Fed action offered some drama, it did not surprise markets. Policy makers did not signal they were calling off the rate-rise campaign, only that they were preserving their ammunition for use if needed.

"They did pretty much what was expected by leaving rates unchanged, but more importantly if you look at the statement they are certainly leaving the door open to the possibility of further hikes if needed," said economist Rick Egelton of BMO Financial group in Toronto.

A Reuters poll on Tuesday underlined the doubt about the Fed's future course. Thirteen out of 23 primary dealers -- the biggest Wall Street firms -- said they thought the Fed was done raising rates and some thought rate cuts were possible by early 2007.

Only four of the 23 dealers expect a rate rise from the next FOMC meeting, scheduled for September 20.

As the Fed meeting began, the government reported that growth in productivity, or hourly output per worker, slowed to a 1.1 percent annual rate in the second quarter of this year from 4.3 percent in the first quarter.

After its previous meeting on June 29, the Fed cited steady productivity gains as having helped curb inflation expectations, a conclusion that may come into question after the softer second-quarter productivity performance.

This time, there was no reference to productivity and some analysts predicted its weakening pace was one reason the Fed will be obliged to raise rates again later this year.

"I'm a bit surprised to see the Fed saying inflation was moderating while we are having signs, including today's productivity numbers, that inflation is not decelerating," said economist Tim Rogers of Briefing.com in Boston, adding he expected rate rises to resume later this year.

Soaring oil prices that topped $77 a barrel earlier this week are causing anxiety among consumers.

Rate pinch coming

In recent speeches, Fed officials have cited softening data and stressed the full impact of prior increases in overnight interest rates had yet to be felt.

They have also expressed hope that slowing growth might dampen upward price pressures.

In the second quarter, the economy grew at an annual clip of 2.5 percent, much slower than the brisk 5.6 percent pace in the first three months of the year.

And last week, the government's employment report showed only 113,000 jobs were created in July, down from 124,000 in June and below the first quarter's monthly average 176,000.

In addition, the previously soaring housing sector has lost altitude as would-be buyers face stiffer financing costs and builders reduce groundbreaking in response to weakening sales.

But consumer prices have kept rising.

The Fed's preferred inflation gauge, the core personal consumption expenditures price index, which excludes food and energy, rose 2.4 percent in the year through June -- well ahead of the pace perceived to be the Fed's comfort zone.