msnbc.com
updated 12/12/2006 4:13:51 PM ET 2006-12-12T21:13:51

Federal Reserve policymakers Tuesday held their last scheduled meeting of the year and decided to leave short-term interest rates unchanged, saying the economy is likely to expand moderately next year despite a "substantial cooling of the housing market."

It was the fourth straight time Central Bank Chairman Ben Bernanke and his colleagues have met and elected to leave benchmark rates unchanged, with the key overnight lending rate locked at 5.25 percent, where it has stood since June 29.

The overnight rate, also known as the federal funds rate, affects a wide range of consumer and business loans and is used to set the commercial prime rate, among others.

With the U.S. economy clearly slowing, many economists have been asking whether a cut in rates may be needed to revive growth.

But based on recent comments by Fed members, inflation fears still have the upper hand in their discussions. The Fed said Tuesday that central bankers are concerned about pricing pressure but believe inflation will moderate "over time."

Bob McTeer, former president of the Dallas Fed, called the Fed statement "slightly more dovish" than after its last meeting in October because it stressed the "substantial" cooling of the housing market.

Video: Fed balances inflation vs. growth But he said the economic outlook was uncertain, meaning that Fed members will focus on inflation "because that's in their job description."

John Silvia, chief economist at Wachovia Corp., said the Fed's emphasis on the latest "mixed" economic indicators suggests the Fed is "not ready to raise rates and more likely to lower rates ahead."

He predicted the Fed will cut rates in March.

After kicking off the year with a sizzling 5.6 percent growth rate in the first quarter, the  economy is now growing at less half that rate, due largely to a slowdown in the housing market and a slump in car sales.

The unemployment rate edged up to 4.5 percent last month, the government reported Friday. But employers also added 132,000 jobs in November, according to the government report. That was an improvement from just 79,000 added in October.

Major Market Indices

And holiday retail sales have generally been strong, although final results of this crucial season will not be known for several weeks. Consumer spending accounts for about 70 percent of U.S. economic activity, so the final two months of the year are key to the economic outlook.

Under former Chairman Alan Greenspan and then Bernanke, the Fed raised rates 17 straight times from June 2003 through June 2005, ratcheting up the overnight rate from a 46-year low of 1 percent to keep a lid on economic growth and inflation.

But the Feed's "pause" after its move more than five months ago has turned into a rate plateau, with analysts divided on whether the Fed will cut rates, raise rates or leave them unchanged next year.

The Fed's policymaking Open Market Committee is scheduled to hold its next meeting Jan. 30 and 31.

Full text of Fed statement
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Economic growth has slowed over the course of the year, partly reflecting a substantial cooling of the housing market. Although recent indicators have been mixed, the economy seems likely to expand at a moderate pace on balance over coming quarters.

Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Voting for the FMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Byes; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; William Poole; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting.

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