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Fed holds key short-term interest rate steady at 45-year low

WASHINGTON —The Federal Reserve held a main short-term interest rate at a 45-year low today amid signs that the economy is getting on firmer footing after months of wobbling.

Fed Chairman Alan Greenspan and his Federal Open Market Committee colleagues — the group that sets interest rate policy in the United States — kept the federal funds rate at 1 percent. The funds rate, the interest banks charge each other on overnight loans, is the Fed's primary tool for influencing the economy.

The decision was unanimous.

The Fed said that currently low short-term interest rates "can be maintained for a considerable period."

Some economists believe the Fed will hold the funds rates steady at it next meeting on Oct. 28 and through the rest of this year.

Currently low rates are "providing important ongoing support to economic activity," the Fed said.

Holding the funds rate steady means that commercial banks' prime lending rate for many short-term consumer and business loans will remain at 4 percent, the lowest level since 1959. Any changes to the funds rate affects the prime lending rate.

Maintaining a climate of near rock-bottom short-term borrowing costs may make consumers and businesses feel more inclined to step up spending and investment, which would spur economic growth.

The Fed said that economic data since the last meeting in August confirmed that "spending is firming, although the labor market has been weakening. Business pricing power and increases in core consumer prices remain muted."

Fed policy-makers repeated concerns today that they are more concerned that inflation will move lower , rather than higher. Although Fed policy-makers say the chance of deflation, an economically dangerous fall in prices is remote, they must nevertheless be on guard against it because of its potential to wreck the economy.

The Fed last cut the funds rate on June 25 by one-quarter percentage point. That marked the 13th reduction since January 2001, when the central bank's credit-easing campaign began. In its meetings since then, the Fed has left the funds rate unchanged.

Super-low short-term interest rates, along with President Bush's third round of tax cuts, have helped get the economy's anticipated rebound in the second half of this year off to a good start, economists said.

The National Association for Business Economics predicts the economy will grow at a rate of 4.5 percent in the current quarter and at a 4 percent pace in the final quarter of this year. If that bears out, it would mark the economy's strongest back-to-back quarterly growth rates since the final half of 1999.

The forecast also would mean economic growth in the second half of this year would clock in at a rate of 4.3 percent, a big improvement from the lackluster 2.3 percent growth rate in the first six months.

Consumers, a main force pushing the economy, are keeping the nation's cash registers busy. The housing market continues to thrive despite a recent upward swing in longer-term mortgage rates. Manufacturing, while struggling, remains in recovery mode.

Private economists say there are risks, however, to the notion that the economy will stage a sustained rebound in the second half of this year. Businesses, wanting profits to improve and uncertain about the rebound's vigor, remain cautious in their spending and in hiring.

Although the nation's unemployment rate dipped to 6.1 percent in August, businesses slashed 93,000 jobs, marking the seventh month in a row that the economy lost jobs. A steady stream of job losses could chill consumers' willingness to spend and thus slow down the pace of recovery, some economists said.

If the sluggish job market were to threaten the expected second-half rebound, the Fed wouldn't hesitate to reduce short-term rates, said economists, who, nonetheless, believed such a scenario was remote. NABE said that two-thirds of 35 forecasters recently surveyed said they expected the economy to be adding at least 100,000 jobs per month by the end of the year.


On the Net:

Federal Reserve: www.federalreserve.gov