Fed Holds Interest Rate at 1 Percent

55 minutes ago Add Business - AP to My Yahoo! By MARTIN CRUTSINGER, AP Economics Writer

WASHINGTON - The Federal Reserve (news - web sites) left a key short-term interest rate at a 45-year low on Wednesday but dropped a promise it had been making since August to keep rates low "for a considerable period."

The wording change was enough to jolt financial markets, sending stock prices plunging, even though private economists said they believed the Fed still planned on keeping rates unchanged for most of this year.

The Dow Jones industrial average, which had been in positive territory before the Fed's afternoon announcement, lost more than 100 points in late afternoon trading.

Bond prices dropped as well, sending interest rates set by the market sharply higher.

Short-term rates tied to Fed actions did not move at all because the Fed left its target for the federal funds rate, the interest that banks charge on overnight loans, unchanged at 1 percent, where it has been since last June. That means commercial banks' prime rate, the benchmark rate for millions of consumer and business loans, remains unchanged at 4 percent, the lowest rate since 1959.

The adverse market reaction occurred because the Fed dropped the phrase it had included in its last four policy statements — that it believed it low inflation and slack utilization of resources gave it the leeway to keep rates low "for a considerable period."

Instead, the central bank, still citing the low inflation and slack resource utilization, said it believed "it can be patient" in deciding to raise interest rates.

While the wording change was subtle, Wall Street worried that by dropping the phrase "for a considerable period," the central bank is getting closer to beginning a series of rate hikes to make sure the rebounding economy does not trigger inflation.

Still, private economists said the statement as a whole does not indicate the central bank is edging closer to a rate hike.

"The Fed is getting the market ready for tighter monetary policy eventually, but they are not going to raise interest rates any time soon," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

Complicating the issue this year is the presidential election. The central bank usually tries to avoid changing rates too close to the November vote out of concern that it could be seen as trying to favor one party over the other.

For that reason, many economists said they still believe the central bank will stay on hold until after voters go to the polls in November.

"We have a slight change in wording, but I don't think there will be any change in policy until after the election," said David Jones, head of DMJ Advisors, an economic consulting firm. "The Fed is not going to act anytime soon to hike interest rates with inflation low and the unemployment rate still high."

The Fed last raised rates in June 2000, when it hiked the federal funds rate by a half-point to 6.5 percent, the last in a series of six rate increases the central bank had begun in June 1999.

Those rate hikes did slow economic growth, but they also contributed to a bursting of the stock market bubble in early 2000. The fallout pushed the country into a recession in March 2001, ending a 10-year economic expansion, the longest in U.S. history.

Seeking to combat the growing economic weakness, the Fed started in January 2001 to cut interest rates in a series of moves that picked up momentum after the Sept. 11, 2001, terrorist attacks, making 2002 the most aggressive period of rate cuts since Federal Reserve Chairman Alan Greenspan (news - web sites) took the top Fed job in 1987.

Most of the rate cuts occurred in 2001, although 2002 saw a half-point cut and a quarter-point cut. That reduction last June pushed the funds rate down to 1 percent, the lowest it has been since Dwight Eisenhower was president.

The Fed last June was concerned about the remote possibility that the country's long period of economic weakness could trigger a destabilizing bout of falling prices, or deflation, something last seen in the United States during the Great Depression.

In its statement Wednesday, the central bank said the upside and downside risks to achieving acceptable economic growth were roughly in balance.

It made no change in this so-called "balance of risk" assessment, although the central bank has appointed a working group of officials who are studying ways to improve the wording of this section of the Fed's statement. The assessment is designed to signal to markets possible future rate moves, but last year it generated a fair amount of confusion after the central bank split the balance of risks into an economic growth assessment and an assessment of whether inflation or deflation posed the greater threat.

Analysts said the fact that there was no change in the "balance of risks" portion of the statement probably indicated that Fed policy-makers remain split on what improvements need to be made.

I am about as knowledgeable about the Stock Market as what John Effin' Kerry knows about being a Conservative, however,....

It seems to me that these DOLTS at the FED need a good kick in the calculator from GWBush.

With just a few well chosen words they cause a panic and the market drops 139 points in 4 minutes...

Why does W keep Greenspan around? Greenspan, I think, was one of the KEY reasons for the Clinton Recession. Along with Microsoft suit, Al and Bill conspired to cause the recession at the end of the Clintoon admin, just in time for W to inherit the downturn and cause him grief for three years or so.

You cannot find the MEDIA pointing out that the recession ACTUALLY DID start in March of 2000 and they Will Not print that fact. There was a post here just days ago citing a report from a Gubmint panel saying just that.

Greenspan should go and we should get some people on the Fed that won't be flapping their lips without thinking that they can affect the market so much in just one day.

I understand that the market alone is not "the economy" however, the DemoDolts use "the economy" as a bat to bash at will.

Say goodbye Alan...when BUSH wins in '04.

Well?

GRRRRRollin' 04 the USA

The debate as to the efficacy of G-span and his various moves is long and drawn out.

However, one has to remember exactly what he is charged with. Today I heard some pundit declare on TV that he is charged with "controlling inflation and keeping unemployment 'low'". As I understand it, nothing could be further from the truth. Also, regardless of whenever one might think the recession started, his handling of it has been nothing but inept IMO. Because IMO not only did he create the conditions which spawned it, he largely triggered it. And his steadfast refusal to let things run their course has delayed the repair of the conditions that grew the recession. Ten years from now I predict he will NOT be the object of hero worship as he now is. Except of course, by the member banks.

He is the head of the central bank, a private, non-government coporation owned by and operated for the benefit of its' member banks. Period. Far from controlling inflation, he is doing his best to induce it at this point. Why? Because his interests lie in maintaining the rising price of assets so that the loans securing them remain serviced. He is interested in a rising stock market so that pension funds are refloated without excess cash contributions from the corporate sponsors of same. Employment, he could care less about. He is interested in the health of the member banks that comprise the Fed. That means: loans get repaid. He has compensated for the loss of jobs over the past few years by lowering interest rates to inarguably synthetic levels, which has seriously eroded the value of the dollar. But everybody's happy because they can borrow money for trash at low rates. Meanwhile, the mantra has been "there's no inflation". Right. Who actually believes there is no inflation? The people overjoyed at the runup in their home prices or the ones who are having a rough time affording insurance of ALL types? And he has taken up the cause of "productivity" which for most people means that fewer people perform the same amount of work; hence corporate wages paid decline. Again, there's no such singular thing as "the economy"..in the sense that if you and I go to a Yankees/Red Sox game and your team is the Yankees and they lose, it's a lousy game for you and a great game for me.

Gspan gets a lot of credit for his handling of some of the crises of the past decade and a half, but in my view he not only sewed the seeds of same, he created the crises on top of the unstable conditions he himself fostered. It's a lot like glorifying an arsonist for putting out the fires he himself has set.

"...Wall Street worried that by dropping the phrase "for a considerable period," the central bank is getting closer to beginning a series of rate hikes..."

I'm not an economonist, either. It is all rather complicated, but when interest rates are kept low, new competition is given a chance to get its start in the market. Employee wages go up, unless employers remain very stubborn against hiring more. Also, the US Dollar falls with respect to other currencies--good for employees but with some hint that some power might be taken from the established market elite. The elite in some other countries, BTW, want their currencies to be worth more in the world markets. When US employment rates fall, they cash in their investments. They would much rather buy products from the US cheaper.

Some US corporate leaders don't want new competition, thus all the yelling a couple of years ago on Fox News' Cavuto show about not being able to control Greenspan. Alan Greenspan wants to keep the rate low. President Bush really wants to facilitate an "ownership economy" where the social left, corporate status quo (also known as the "Condottieri") does not own everyone through rentals and other consumerism. This might give, eventually, more power to the politicians and voters. At the same time, US employers want madly to enlarge the labor pool through making sure that every woman works outside the home, more Mexicans are brought in, and so forth. So very established employers want to see the rate go up, as do many US investors.

Some people around Greenspan have urged that some hint be passed to the established elite that interest rates might be raised again, to pacify them. ...thus the foolish word about that to the press, foreignors sell their investments, etc.

If you own enough resources and want to rule US politics with an iron fist, you want interest rates to go up and to keep a large labor pool. If you don't have or want either of the above, you might want to see interest staying low and to have a smaller labor pool in order to have that lower cost, more likely chance of starting a new business or to get higher wages.

...from one who did little more than a Macro-Economics class. ...make any sense?

It looks like the liberals' claims that deficits and interest rates are so closely related is another one of their lies.

What really pissed me off is that my uncle, who is investing for a business, knows that interest rates are low. But he said, "I hope they stay that way with 'old what's his face' in the whitehouse." How the hell can he try to blame Bush for high interest rates? I understand George isn't perfect, and is spending too much, but he did work to lower the interest rates, and all people like my uncle can do is attack him for it being "probably temporary." Probably because he doesn't want to admit to taking a personal risk by investing his own money.

I agree with much of what you wrote here.

As I learned long ago, there ain't no "federal" in the Federal Reserve System. However, I believe that most citizens, when hearing or reading the financial news, have the mistaken idea that since Bush (or any president) ceremoniously appoints the "fed" chairman, the Federal Reserve must somehow be a federal agency (of some sort).

It was the Congress, though, that permitted the Federal Reserve to change our money system to "federal reserve notes" and take our currency off silver and gold.

As the story goes, in 1920, a $20 gold coin could buy a man a nice custom-made, three piece suit. Today, that same $20 gold coin could do the same. Try buying that with a $20 "federal reserve note" today and see what you end up with!

If you want to see more on how the federal government has financially deceived the citizens of this country, check out the following --

www.861evidence.com

www.861.info (broadband required)

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