Federal Reserve policy-makers left short-term interest rates unchanged at their lowest levels in 45 years Tuesday, acting as expected to ensure the nascent economic rebound continues to gain momentum.
Fed Chairman Alan Greenspan and his central bank colleagues voted unanimously to leave the benchmark overnight federal funds rate at 1 percent, meaning a host of related consumer and business lending rates, including the prime rate, will remain unchanged.
The Fed acted after a government report that consumer prices, excluding the volatile food and energy categories, have risen only 1.3 percent over the past year, the lowest rate since 1966. The consumer price data offered fresh reason for concern about the possibility of what the central bank called “an unwelcome fall in inflation” from already-low levels. Policy-makers are particularly concerned that falling inflation could turn into falling prices, or deflation, that would be difficult to fight.
In language that was nearly identical to a statement issued after the last meeting of policy-makers five weeks ago, the Fed said the latest evidence of stronger economic growth has been offset by a “weakening” labor market, leaving upside and downside risks to future growth “roughly equal.”
“There are some people speculating they were trying to keep a low profile, and there may be something to that,” said Ed McKelvey, senior economist for Goldman Sachs. “It is remarkable how little this statement changed.”
Stock prices surged after the Fed’s afternoon announcement, which reiterated the central bank’s intention to leave interest rates low “for a considerable period.”
The Dow Jones industrial average closed with a gain of 119, or more than 1 percent at 9567.
“The stock market likes the idea that interest rates are going to be kept low both in the short term — and hopefully long-term rates as well,” said Sung Won Sohn, chief economist for Wells Fargo.
Long-term rates, including mortgage rates, spiked over the summer, rising from their lowest levels since the 1950s and quickly ending the latest wave of mortgage refinancing. Mortgage rates are tied to the bond market, where traders were beginning to express concern that the Fed might begin raising short-term rates again next spring.
Over the past few weeks longer-term rates have drifted back down as central bankers including Fed Governor Ben Bernanke have emphasized that they intend to keep rates low for a long time to battle the potential for deflation.
Many analysts do not expect the Fed to raise the federal funds rate from its current level until the second half of 2004 or even 2005.
Sohn said it would take “sustained economic growth over a couple of quarters” plus an increase in consumer inflation for Fed policy-makers to even consider raising interest rates.
Steven Wieting, senior economist at Salomon Smith Barney, agreed, saying the Fed could even reduce rates further if the inflation rate shows signs of falling further.
“We have a sick patient, and the Fed will keep interest rates accommodative until the inflation outlook meaningfully turns,” he said. “The risk of further disinflation would be more negative for the economy than a rise in inflation.”
After an eight-month recession in 2001, the economy has grown only sluggishly, expanding in fits and starts, frustrating policy-makers and investors. In recent weeks there have been growing signs that the economy at last is responding to massive stimulus including the latest round of federal tax cuts and 13 interest rate cuts by the Fed beginning in January 2001.
Retail sales rose in August for a fourth straight month, boosted by lower federal withholding rates and $13 billion in child tax credit payments mailed to taxpayers in July and August. The long-battered manufacturing sector also has shown signs of life with steady growth in orders and production. Some economists expect the gross domestic product to grow at a rate of more than 5 percent in the current quarter, which would be the fastest pace since the heady days of 1999.
Still, policy-makers at the Fed and elsewhere are concerned that the economy has been steadily losing jobs even as output is boosted by productivity gains. The economy lost an estimated 93,000 jobs in August, the seventh straight month of losses and a major disappointment after many forecasters projected the number finally would turn positive. New claims for unemployment benefits also have been disappointing, having risen for the past three weeks to back above the 400,000 level, which generally indicates rising unemployment.
Following is the full text of the Fed’s statement:
TEXT OF FED STATEMENT
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 1 percent.
The Committee continues to believe that an accommodative stance of monetary policy, coupled with robust underlying growth in productivity, is providing important ongoing support to economic activity. The evidence accumulated over the intermeeting period confirms that spending is firming, although the labor market has been weakening. Business pricing power and increases in core consumer prices remain muted.
The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. In contrast, the probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level. The Committee judges that, on balance, the risk of inflation becoming undesirably low remains the predominant concern for the foreseeable future. In these circumstances, the Committee believes that policy accommodation can be maintained for a considerable period.
Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Ben S. Bernanke; Susan S. Bies; J. Alfred Broaddus, Jr.; Roger W. Ferguson, Jr.; Edward M. Gramlich; Jack Guynn; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; Robert T. Parry; and Jamie B. Stewart, Jr.