Fed Holds Rates Steady, Maintains Inflation Warning
By Greg Robb, MarketWatch
WASHINGTON (MarketWatch) -- The Federal Reserve decided to remain on the sidelines Wednesday, keeping interest rates steady but leaving the door open for further increases if inflation does not behave.
The Federal Open Market Committee voted to hold overnight interest rates steady at 5.25%.
It was the third straight meeting with no change in monetary policy. It follows rate hikes at an unprecedented 17 consecutive policy-setting meetings that brought overnight rates from a decades-low of 1% to 5.25%.
The wording of the announcement from the FOMC was little changed from the September statement. The committee added a forward-looking phrase and took out language suggesting that high energy and commodity prices had the potential to add to inflationary pressures.
"Economic growth has slowed over the course of the year, partly reflecting a cooling of the housing market," the statement said. "Going forward, the economy seems likely to expand at a moderate pace." Read the full statement.
"Nonetheless, the committee judges that some inflation risks remain," the statement said. Further rate hikes, if any, would depend on "the evolution of the outlook for both inflation and economic growth."
"All of this indicates that the FOMC continues to have faith in its forecast of modest growth and stabilizing and then eventually receding core inflation," said Joshua Shapiro, chief economist for MFR. "Therefore, until something happens that causes the FOMC to seriously question this forecast, monetary policy would appear to be on hold."
Oscar Gonzalez, an economist with John Hancock Financial Services, said the Fed was likely to remain on hold for 12 months.
"They are aware that there is an inflation risk but they are not committed to raising rates at this point given the information that the economy really is slowing down. The policy is to wait and see what the data tells us," said Gonzalez.
"The bottom line is that the statement had a hawkish tone," said Mike Moran, chief economist for Daiwa Securities America. "They are not considering easing monetary policy at this time (but) I think it's likely they will have to tighten again sometime in 2007."
Not out of the woods yet
Fed officials are waiting to see whether the slowdown in the housing and auto sectors in the third quarter spills into other sectors in coming months or whether the economy rebounds, thereby putting renewed pressures on consumer price inflation, which remains quite high.
Economists said growth in the third quarter may have weakened to about a 2% annual rate, the slowest quarterly growth rate since the first quarter of 2003. Read Economic Preview.
On the other hand, core consumer price inflation rose to a 2.9% year-over-year rate in September, the highest rate in a decade. See full story.
The FOMC said it expects inflationary pressures to moderate gradually as the economy slows, but Fed officials see risks on both sides of the outlook.
The decision to remain on the sidelines was no surprise. Ahead of time, economists were in agreement that the FOMC would extend its "pause" to allow more time to assess the likely direction of the economy.
Stocks weakened slightly after the Fed meeting ended. Read Market Snapshot.
Bond prices rose, putting pressure on yields, as investors say the Fed could hold rates steady for some time. See full story.
The dollar extended losses as the Fed was not seen as ratcheting up its inflation worries. See Currencies coverage.
"Clearly, these are minor tweaks and anyone looking for new signals in the wording of the statement is going to have to stretch things pretty far. Indeed, the bond market showed very little initial reaction upon release of today's statement," said David Greenlaw, economist with
Morgan Stanley.
Sincerely,
Kathy
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