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Fri, Sep 22, 2006 - Page 10 News List

Fed holds interest rates at 5.25%

MORE OF THE SAME There were no surprises when Ben Bernanke and his colleagues announced they were holding rates steady for a second consecutive month

AP , WASHINGTON

It is looking more and more like it could be 17 and done for the US Federal Reserve.

There is a growing view that after 17 consecutive rate increases, the longest stretch in Fed history, the US central bank will keep rates steady for the rest of this year.

Some economists are forecasting that the next Fed move will be to cut rates, possibly as early as next spring, in response to a slowing economy and falling inflation pressures.

As widely expected, Fed Chairman Ben Bernanke and his colleagues held rates steady at Wednesday's meeting, issuing a statement that was virtually identical to the one the Fed released after its Aug. 8 meeting, the first time it paused after two years of raising rates.

The action left the federal funds rate, the interest that banks charge each other, at 5.25 percent. That meant that banks' prime lending rate, the benchmark for millions of consumer and business loans, will stay at 8.25 percent.

The vote to hold steady was 10-1 with Jeffrey Lacker, the head of the Richmond regional Fed bank, dissenting in favor of a further quarter-point hike. He had also dissented in favor of a rate hike last month.

Fed officials kept the door open to further rate increases, saying as they had last month that "some inflation risks remain." They also repeated their view last month that any further rate hikes "that may be needed to address these risks" will depend on how the economy performs.

But private economists noted that all the small changes to the statement seemed to be in the direction of staying on hold and letting the current economic slowdown do the job of pushing inflation rates back down to acceptable levels.

"This was a very financial-market friendly statement," said Mark Zandi, chief economist at Moody's Economy.com. "The minor tweaks in the verbiage suggest the Fed is finished tightening."

The Fed meeting occurred against a backdrop of a number of developments that suggest the central bank's goal of having an economic slowdown take pressure off inflation was unfolding.

Oil prices, which had soared above US$77 per barrel in mid-July, have fallen to close to US$60 per barrel. That has helped push down gasoline prices from record highs above US$3 per gallon to around US$2.50 per gallon across the US.

The favorable development on energy is already showing up in the government's inflation statistics with both consumer and wholesale prices slowing sharply last month.

At the same time, the overall economy has slowed to a growth rate of just 2.9 percent in the spring after racing ahead at a torrid 5.6 percent pace in the winter.

Many analysts believe that growth has slowed even further in the last half of this year to a pace of around 2.5 percent.

That could translate into the Fed's hoped-for soft landing in which the economy slows enough to keep inflation under control but not so much that the US tumbles into a recession.

But one major question mark is what will happen to housing, which has sagged significantly this year. The government reported this week that new home construction plunged 6 percent last month, the fifth decline in the past six months.

The concern is that a steep decline in housing could rattle the economy much as the popping of the stock market bubble did in 2000.

"The jury is still out on a soft landing. We think we are going to succeed, but we can't be sure yet," said David Wyss, chief economist at Standard & Poor's in New York.

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