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Fri, Oct 27, 2006 - Page 10 News List

Analysts expect flat rates until June

UNCHANGED Pundits believe that the US Fed will keep its monetary policy unchanged in the face of lackluster economic growth as reflected by the housing slowdown


The US Federal Reserve, after an unbroken two-year stretch of raising interest rates, may now be entering a prolonged period where the central bank keeps rates unchanged.

It could be next June or later before the Fed makes any change in interest rates because of the opposing forces buffeting the US economy at present.

Analysts hold that view because they think inflation is likely to linger at levels that will keep the Fed from cutting rates and economic growth will be too slow to think about raising rates.

The central bank, in announcing on Wednesday that it was keeping the federal funds rate unchanged for a third straight meeting at 5.25 percent, cited the twin dangers it is confronting.

The Fed statement said core inflation, which excludes energy and food, remained at "elevated" levels even as overall economic growth has been slowing, reflecting in part the slowdown in housing.

Adverse reaction

There was no surprise in the Fed's action. Wall Street had widely expected the Fed would not want to resume rate hikes and risk an adverse reaction in financial markets with just two weeks to go before the congressional elections next month.

The Fed's decision means millions of borrowers will get a break on everything from credit cards to home equity lines to other loans that are tied to the prime rate. The prime will remain at 8.25 percent, where it has been since June, the last time the Fed raised rates.

Analysts saw the Fed's brief statement on Wednesday as confirmation of their belief that the central bank is through raising rates, but at the same time is in no hurry to start cutting rates.

"The Fed is telling us that there will be no change in monetary policy for the foreseeable future," said Mark Zandi, chief economist at Moody's Economy.com.

Lyle Gramley, a former Fed governor who is now an economic consultant in Washington, said the idea of cutting interest rates "isn't on the radar screen at all" because core inflation is running nearly a full percentage point above the Fed's upper level comfort zone of 2 percent.

But on the other hand, "the Fed knows if you were to raise rates now you could turn what is a reasonably orderly decline in housing into a rout and threaten pushing the economy over into a recession," Gramley said.

Federal Reserve Chairman Ben Bernanke earlier this month said that the "substantial correction" going on in housing would shave growth by a full percentage point in the second half of this year.

After beginning the year with a 5.6 percent rate of growth, the US economy slowed to a sluggish 2.6 percent rate in the spring.

Analysts believe that growth in the just-concluded third quarter slowed even further to 2 percent or less. The government will report the actual number today.

Falling energy costs

Nariman Behravesh, chief economist at Global Insight, said he believed the economy, after slowing to a lackluster growth rate of 1.5 percent in the third quarter, will rebound to growth of around 2.5 percent in the final three months of this year as consumers are helped by the recent big declines in the cost of gasoline and other energy products.

That would still be below the economy's long-run trend of around 3 percent, which means unemployment is likely to tick up from the current low for this recovery of 4.6 percent to possibly 4.8 percent by the middle of next year.

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