Federal Reserve Board leaves interest rates unchanged

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Once again,
Federal Reserve Board officials gathered in Washington, threw a wild party at which they discussed exciting topics like the gross domestic product deflator and unit labor costs, and then decided to leave interest rates unchanged.

The decision to keep the federal funds rate at 6.5 percent and the federal discount rate at 6 percent means consumer loan rates will remain relatively stable over the next several weeks. Members of the Fed’s policy-setting group, the Federal Open Market Committee, said they went with the status quo because they believe the economy is slowing and inflation remains quiescent.

“Recent data have indicated that the expansion of aggregate demand has moderated to a pace closer to the enhanced rate of growth of the economy’s potential to produce,” the
FOMC’s post-meeting statement said. “The more rapid advances in productivity also continue to help contain costs and hold down underlying price pressures.”

At the same time, they kept their unofficial “bias” toward higher rates in place, indicating that inflation could get worse due to low unemployment and high energy prices.

“The utilization of the pool of available workers remains at an unusually high level,” the FOMC said. “Moreover, the increase in energy prices, though having limited effect on core measures of prices to date, poses a risk of raising inflation expectations. The subdued behavior of those expectations so far has contributed importantly to maintaining an environment conducive to maximum sustainable growth.”

Market watchers widely anticipated the Fed’s latest announcement and most don’t think officials will change their tack over the next couple of months either. That will keep rates on products directly impacted by Fed moves, such as credit cards and home equity lines of credit, stable.

There is a chance the Fed will drop rates starting next year, however. That would allow rates on long-term mortgages and certificates of deposit to decline slowly over the course of the fall and winter, since those rates change in anticipation of future Fed moves rather than waiting for the moves themselves.

FOMC officials gather two more times in 2000 — on Nov. 15 and Dec. 19. After that, they hold three meetings during the first five months of 2001; Jan. 30 – Jan. 31, March 20 and May 15. Provided reports continue to indicate a slowdown in U.S. economic activity and neither oil price nor wage pressures spark an outbreak of rampant inflation, officials could cut rates at one of the latter powwows.