US Fed leaves key interest rate unchanged - extended

Analysis

Major US stock indices were little changed Thursday after central bankers left key interest rates unchanged.

This was the eighth consecutive time that the central bank held the federal funds rate, interest commercial banks charge each other on overnight loans, steady at 5.25% since late June 2006. After boosting rates at its 17 regular policy-setting meetings in a row over two years, the Fed paused in August last year and left rates alone in September, October, December, January, March and May. As a result of the Thursday decision, commercial banks' prime lending rate, the benchmark for millions of consumer and business loans, will remain at 8.25%. The prime rate responds to changes in the federal funds rate.

The decision was widely expected by economists even though government data showed that the economy had slowed down significantly in the first three months. The tiny 0.7% rate was much slower than the 2.5% pace in the previous quarter. The housing slump, which started last year as interest rates were rising, was a big drag to the economic growth in the Q1. Investment in home building plunged by 15.8%, on an annualized basis, in the Q1, deeper than the 15.4% drop previously estimated. However, the economy has not lost all momentum for expansion. Continued increases in personal consumption expenditures had been a major pushing force. Many economists expect the economy to expand at an annual rate of 2.3% to 3% in the April-to-June quarter.

A statement issued Thursday by the Fed showed that the central bank is still concerned more about inflationary pressures than slowdown in economic growth. In the statement, the Fed said that economic growth appears to have been moderate during the H1 of this year, despite the ongoing adjustment in the housing sector. “The economy seems likely to continue to expand at a moderate pace over coming quarters,” it added. As for inflation, the Fed said readings on core inflation have improved modestly in recent months. Excluding volatile energy and food, the core inflation has been closely watched by the central bank as a key inflation measure. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated, said the Fed. “Moreover, the high level of resource utilization has the potential to sustain those pressures.” In these circumstances, the Fed's predominant policy concern “remains the risk that inflation will fail to moderate as expected.” Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information, the Fed said. Analysts believe that the Fed could hold interest rates steady through the rest of this year and well into 2008.

The blue-chip Dow Jones Industrial Average slipped 5.45 points, or 0.04%, to 13,422.28. The broader Standard & Poor's 500 Index was off 0.63 points, or 0.04%, to 1,505.71. The technology- heavy Nasdaq Composite Index added 3.02 points, or 0.12%, to 2,608.37. The US currency edged up, closing at 74.38 euro cents from 74.36 euro cents on Wednesday. The dollar rose against the Japanese currency to 123.18 yen from 122.67 yen on Wednesday. Gold gained $5.15 to $647.25 per fine ounce. (people.com.cn, monstersandcritics.com)

 

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