Fed holds rates steady
WASHINGTON — The Federal Reserve, noting encouraging signs that the economy is working through a “soft spot,” left interest rates unchanged Tuesday and signaled that November’s rate cut may turn out to be the last one needed for recovery.
The Fed decision to leave its benchmark for overnight bank loans at a 41-year low of 1.25 percent means that Americans will be able to keep borrowing at the lowest interest rates in decades on everything from auto loans to home equity loans.
Because of the Fed decision, banks’ prime lending rate, the benchmark for millions of consumer and business loans, will remain at 4.25 percent, its lowest point since May 1959.
The central bank struck a more positive tone about the economy in the brief statement announcing its decision than in November when it had cited rising concerns about economic weakness stemming from increased “geopolitical risks” of a possible war with Iraq.
In yesterday’s statement, the Fed said economic signs since then “are not inconsistent with the economy working its way through its current soft spot.”
The central bank expressed the belief that the already low level of interest rates, coupled with continued strong gains in U.S. workers’ productivity, was laying the groundwork for a sustainable economic rebound.
Many analysts read the decision to leave rates unchanged and the more positive tone to the statement as a clear indication that the central bank believes it has done enough to guard against a double-dip recession.
“The Fed is pretty much done for this cycle unless there is some major unforeseen disruption to the economy such as a messy war in Iraq,” said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.
Wall Street took the Fed’s decision to leave rates unchanged, which had been widely expected, in stride. The Dow Jones industrial average rose 100.85 points to finish the day at 8,574.26 as bargain hunters went shopping for stocks following a 458-point slide in the Dow over the past seven sessions.
The Fed, which aggressively cut rates 11 times in 2001 as it struggled to deal with the country’s first recession in a decade and then the economic fallout from the terrorist attacks, had left its fund rate unchanged through most of this year, until the half-point cut on Nov. 6.