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Thu, Aug 10, 2006 - Page 10 News List

Fed leaves US interest rates at 5.25%

END OF A RUN The Federal Reserve Board said its decision was based on a slowing US economy. Jeffrey Lacker was the sole dissenting voice in Tuesday's 9-to-1 vote

AGENCIES , WASHINGTON AND NEW YORK

Traders in the Eurodollar Futures Pit at the Chicago Mercantile Exchange wait for the US Federal Reserve's interest rate announcement on Tuesday in Chicago, Illinois. The Fed's Open Market Committee decided to leave its key interest rate at 5.25 percent.

PHOTO: AFP

The US Federal Reserve on Tuesday left its benchmark interest rate at 5.25 percent, ending a record string of 17 straight increases dating back to 2004.

But the Fed also said that "some inflation risks still remain" and left the door open for further rate increases later in the year, sending US stocks lower after the announcement.

In a 9-to-1 vote, the Federal Reserve Board said it based its current decision on a slowing US economy.

"Economic growth has moder-ated from its quite strong pace earlier this year," a statement from the board said, adding that it would keep a close eye on inflation and economic growth until its next meeting in six weeks.

"The extent and timing of any additional firming that may be needed to address these [inflation] risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information," the statement said.

US stocks fell as investors worried that slowing economic growth would hurt corporate profits despite the pause in rates hikes.

The Dow Jones industrial average fell 45.79 points, or 0.41 percent, to end at 11,173.59. The Standard & Poor's 500 Index declined 4.29 points, or 0.34 percent, to finish at 1,271.48. The NASDAQ Composite Index dropped 11.65 points, or 0.56 percent, to close at 2,060.85.

"Once the dust settled, the Fed is [saying] their forecast is not the best one for the equity market," said Joe Liro, market strategist for Stone & McCarthy Research Associates, in Princeton, New Jersey.

With the "housing sector weakening, the consumer sector a little soft and even the investment side looking a little bit dicey -- the three cornerstones of private-sector growth are looking a bit tepid," he added.

Federal Reserve Bank of Richmond president Jeffrey Lacker was the only member who preferred a quarter-point rate hike on Tuesday, marking the first dissenting voice since Fed Chairman Ben Bernanke took over from Alan Greenspan in February.

The benchmark rate has climbed a quarter-point at each Fed meeting since June 2004, from a then historic low of 1 percent to the current 5.25 percent rate.

The Dow Jones Industrial Average closed down 0.4 percent on the announcement.

Leading up to Tuesday's meeting, economists had been hopeful that a slew of recent economic data pointing to a slowdown in growth would persuade the Fed to leave the rate unchanged, though predictions were far from unanimous.

GDP increased at a lower-than-expected 2.5 percent annualized rate in the second quarter of this year, after a 5.6 percent rise in the first quarter, while unemployment climbed to 4.8 percent last month from 4.6 percent in June -- the first monthly jobless rate increase since November.

In a Bloomberg survey of economists, 72 percent predicted Tuesday's outcome -- the least agreement found in three years.

Fed members had voiced concerns over both the slowing economy and still high inflation since their last meeting in June, sending markets periodically up and down in the process.

In one indication of Tuesday's rate halt, Bernanke acknowledged last month the slowing US economy and said the Fed must guard against raising interest rates too high, sparking a 200-point surge in the Dow.

Tuesday's statement suggested that inflation had been kept in check by earlier rate increases, at least temporarily: "Inflation pressures seem likely to moderate over time, reflecting contained inflationary expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand."

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