Fed Chairman Alan Greenspan predicted early this year that the economic recovery wouldn’t take a steady, upward path — that it sometimes would zig downward before zagging upward again. The economy has acted as he forecasted, so he saw no reason to change interest rates.
The Federal Reserve’s open market committee left short-term rates alone Wednesday. For consumers, that means loans tied to the prime rate — some credit cards, auto loans, home equity loans and home equity lines of credit — will remain the same.
The committee maintained the federal funds rate at 1.75 percent, where it has stood for six months. Investors and economists expect the rate to remain there until at least November or December. The rate-setting committee’s next scheduled meeting is Aug. 13.
“The information that has become available since the last meeting of the committee confirms that economic activity is continuing to increase,” the committee said in a statement, adding that business investment and consumer demand “appear to have moderated.”
That’s what economists expected. Kenneth Thomas, finance lecturer at the Wharton School of Business, said the Fed wanted to say that the economic risks are balanced between inflation and weakness, but that it’s tipped a little bit toward weakness.
The federal funds rate, also called the overnight lending rate, is what banks charge one another for overnight loans. It influences other interest rates, most importantly the prime rate, which banks charge their best and biggest customers. The prime rate stands at 4.75 percent.
Regular folks don’t pay the prime rate for loans, but lenders peg some types of consumer debt to the prime rate. When the Fed changes the federal funds rate, the prime rate will follow, and so will the rates on consumer loans tied to the prime rate.
Futures traders at the Chicago Board of Trade generally bet that the Fed won’t change interest rates through year’s end. The open market committee’s next four meetings are scheduled for Aug. 13, Sept. 24, Nov. 6 and Dec. 10.
The Fed influences short-term interest rates, but does not directly affect long-term rates such as those paid on 15- and 30-year mortgages. Instead, long-term mortgage rates respond to changes in the yields paid on 10-year Treasury notes. Those yields are set by the market, which responds to broad economic factors such as inflation and unemployment.
The Treasury bond market also responds to events such as terrorist attacks and corporate scandals. Treasury yields and mortgage rates are likely to dip as a result of the revelation that WorldCom misreported almost $4 billion in expenses as capital spending.
The Fed cut the federal funds rate 11 times in 2001, from 6.5 percent to 1.75 percent, a 40-year low. The Federal Reserve controls the rate indirectly by adding and subtracting cash from the banking system.