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Fri, Feb 02, 2007 - Page 10 News List

Latest Fed report eases market fears of further rate rises

NO CHANGE SOON The central bank maintained that inflation posed a big risk going forward, but that recent developments were mostly encouraging


The Federal Reserve's seven-month pause in changing interest rates could turn out to be a lot longer. Some analysts think the US central bank could stay on hold for all of this year.

That was the view after the Fed's latest comments on the economy relieved worries that the recent rebound in economic growth might be setting the stage for further interest rate increases.

The Fed on Wednesday left the federal funds rate unchanged at 5.25 percent, where it has been since the central bank's last rate hike in June last year.

While it had been widely expected that the central bank for the fifth straight meeting would leave rates alone, the surprising development came in the way the Fed choose to describe the economy.

It gave an upbeat reading on the prospects for economic growth and a benign view on the threat posed by inflation. Those views relieved investors who sent the Dow Jones Industrial Average surging by nearly 100 points on Wednesday to a new closing high.

While the views of "somewhat firmer economic growth" and stabilization in the swooning housing market were welcome, the really beneficial comments came in the area of inflation.

While continuing to maintain that inflation posed a bigger risk going forward than an economic slowdown, the central bank said that recent developments on inflation were encouraging in the closely watched area of core inflation, which excludes volatile energy and food prices.

"Readings on core inflation have improved modestly in recent months and inflation pressures seem likely to moderate over time," the Fed statement concluded.

That brief comment was all investors needed to hear to stop fretting that the central bank was contemplating further interest rate increases.

"This was a message to the markets that you don't need to get overly worried that we could start hiking interest rates," said David Jones, chief economist at DMJ Advisors, a Denver-based consulting firm.

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