Fed Keeps Rates the Same for Fourth Time

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The New York Sun

WASHINGTON (AP) – The Federal Reserve kept interest rates unchanged Tuesday for the fourth straight time as worries about inflation continued to trump concerns about the slowing economy.

At its final meeting of 2006, the central bank left its target for the federal funds rate at 5.25 percent. The funds rate, the interest that banks charge each other, has been at that level since June, when the Fed raised rates for the 17th consecutive time in a two-year effort to combat rising inflation.

The decision means that banks’ prime lending rate, the benchmark for millions of consumer and business loans, will remain unchanged at 8.25 percent.

The Fed decision was approved on a 10-1 vote with Jeffrey Lacker, president of the Fed’s Richmond regional bank, dissenting for a fourth time. He favored another quarter-point rate increase to strengthen the Fed’s inflation fighting efforts.

The action to leave rates unchanged had been widely expected.

Economists believe the central bank could remain on hold through the first half of 2007, watching to see if its previous rate hikes do the job of slowing economic growth enough to keep inflation under control.

In its statement, the Fed continued to signal concerns about inflation, stating, “The Fed judges that some inflation risks remain.” That is the phrase the Fed has been using to signal that further rate hikes are still possible unless inflation slows more.

The Fed’s preferred gauge of inflation, which excludes energy and food, rose by 2.4 percent for the 12 months ending in October, still above the Fed’s 1 percent to 2 percent comfort zone.

The Fed’s goal is to achieve a soft landing for the economy in which growth slows enough to keep inflation under control but not so much that the country topples into a recession.

On growth, the Fed said that the economy has slowed this year reflecting a “substantial cooling of the housing market.” It added the word “substantial” to describe the housing slowdown in this statement.

But the Fed remained upbeat about continued economic growth, saying, “Although recent indicators have been mixed, the economy seems likely to expand at a moderate pace over coming quarters.”

After raising the funds rate to 5.25 percent in June, the longest stretch of consecutive rate increases in Fed history, the central bank passed up the chance to change rates at its meetings in August, September and October and now the December meeting, the final session of the year.

Some economists are worried that the Fed’s hoped-for outcome for the economy could be jeopardized if the current significant slowdown in housing with falling sales and home prices starts to trigger cutbacks in other areas such as consumer spending.


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