The Federal Reserve Does Not Raise The Rate

By Martin Crutsinger
ASSOCIATED PRESS
11:28 a.m. August 8, 2006

WASHINGTON – The Federal Reserve on Tuesday left a key interest rate unchanged, marking at least a temporary pause in what had been the longest unbroken stretch of Fed rate increases in recent history.
The Fed's rate-setting committee voted 9 to 1 to leave the federal funds rate, the interest banks charge on overnight loans, at 5.25 percent. It was the first time the Fed had met and not raised rates in more than two years.
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However, the relief for millions of business and consumer borrowers could be only temporary. The central bank said that “some inflation risks remain,” holding out the possibility that it could resume raising rates at future meetings.
The Fed decision means that banks' prime lending rate, the benchmark for various consumer and business loans, will remain at 8.25 percent. Before the Fed started raising rates in June 2004, the prime had been at 4 percent, its lowest point since 1958.
In 17 consecutive meetings stretching from June 2004 through June 2006, the Fed boosted the funds rate from a 46-year low of 1 percent to the current 5.25 percent, all in an effort to slow the economy enough to keep inflation under control.
The Fed's decision to finally pause had been widely anticipated given the signs of a spreading economic slowdown, in part reflecting the impact of the Fed's long string of rate hikes.
Overall economic growth slowed in the spring to a rate of just 2.5 percent, less than half the pace of the first three months of the year, and on Friday the government reported that the unemployment rate in July rose from 4.6 percent to 4.8 percent.
In explaining its decision, the Fed noted the slowing economy, saying, “Economic growth has moderated from its quite strong pace earlier this year.”
The Fed said this moderation in part reflected a gradual cooling of the housing market, the economic drag caused by rising energy prices and the lagged effects of previous Fed rate hikes.
But the central bank also signaled concerns about continued inflation risks, although it also said “inflation pressures seem likely to moderate over time.”
The central bank said that “the extent and timing of any additional” rate hikes that may be needed will depend on incoming data on both inflation and economic growth.
For the first time since Ben Bernanke took over as chairman in February, the Fed decision was not unanimous. Fed board member Jeffrey Lacker dissented, saying he would have preferred another quarter-point rate hike.
Many analysts believe the pause in rates will be short-lived as Fed policy-makers confront continued inflation pressures in the form of a relentless surge in energy prices and new data that wage pressures are intensifying.
The Labor Department reported Tuesday, just before the Fed policy-makers began meeting, that productivity slowed sharply in the spring while labor costs rose, a combination that could spell inflation troubles down the road.
Many economists believe the Fed will follow the August pause with one and possibly two more quarter-point rate hikes in the fall. The Fed's next meeting is Sept. 20.
Expectations of a pause in the rate hikes had been raised by Bernanke when he delivered the Fed's latest economic forecast to Congress last month, saying the central bank believed that a slowing economy would lower inflation pressures over the next two years.
At 5.25 percent, the funds rate, which is the overnight rate that banks charge to loan other banks, is at its highest point in more than five years.
The funds rate is the Fed's main tool for influencing economic activity. Higher interest rates slow borrowing for homes, cars and other items and in this way depress economic growth.