Originally created 12/22/99

Federal Reserve leaves interest rates unchanged



WASHINGTON -- The Federal Reserve, after bumping up interest rates three times this year to slow the red-hot economy, decided today to leave rates unchanged, even though it expressed continued worries about inflation down the road.

At the same time, the Fed said it would keep its policy directive, intended as a sign of future rate moves, at neutral, citing uncertainties about the Y2K computer date changeover.

"At its next meeting the committee will assess available information on the likely balance of supply and demand, conditions in financial markets and the possible need for adjustment in the stance of policy to contain inflationary pressures," the Fed said in its statement.

The decision was announced after a closed-door meeting by the Federal Open Market Committee, the group of Fed policy-makers who set interest rate policies.

Financial markets had a mixed reaction to the Fed's decision. The Dow Jones industrial average was up more than 36 points in afternoon trading. Bond prices, initially ticked up after the Fed announcement, but fell shortly thereafter as the yield on the bellwether 30-year Treasury bond rose to 6.45, the highest level in more than two years.

By leaving rates unchanged, the federal funds rate, the interest that banks charge each other on overnight loans, continues to stand at 5.50 percent.

In a brief three-paragraph statement, the Fed said that it remained concerned that the economy is growing too rapidly and thus could spark inflationary pressures down the road.

But the central bank said it had decided to hold rates unchanged at this meeting because it wanted to focus interest rate policies on ensuring "a smooth transition into the Year 2000."

Economists had expected the central bank at today's meeting would leave rates unchanged because of its fears any further tightening this close to the end of the year would add unneeded uncertainty to the banking system.

"The Fed decided not to rock the boat approaching the important Y2K season and they left the bias at neutral because there is no clear evidence of accelerating inflation," said Wells Fargo chief economist Sung Won Sohn.

In its statement, the Fed said it was keeping its policy directive at neutral but warned that after the financial institutions have dealt with the Year 2000 computer date change it will reexamine whether further rate increases would be needed to slow the economy to a more sustainable pace.

With projections for continuing strong economic growth ahead, many economists believe the Fed will boost rates again early next year, probably in March.

The central bank has bumped up interest rates three times this year -- on June 30, Aug. 24 and Nov. 16 -- to slow the economy and keep inflation under control. The three increases together totaled three-quarters of a percentage point.

Commercial banks matched their higher costs of borrowing by increasing their prime rates, the benchmark for millions of consumer and business loans, pushing the prime in November to 8.5 percent, the highest it has been in two years.

But the Fed's three rate increases haven't done much thus far to slow the economy, which grew by a 5.5 percent annual rate in the third quarter, far above the 3 percent many economists believe is the most that can be sustained without sparking inflation.

Economists who believe the Fed will tighten further fear that the tight labor market -- with the unemployment rate at a 30-year low of 4.1 percent -- could lead to wage and price inflation. Economists and members of the Fed are concerned that employers scrambling to hire scarce workers will try to attract them with higher wages and benefits, costs that could boost product prices.

On Y2K, Fed Chairman Alan Greenspan has expressed confidence that the banking system is prepared to handle the century date change without any major computer failures.

The Fed also has made sure that the financial system has plenty of currency reserves to meet unexpected demands for cash from customers worried that their bank may have a computer glitch that would prevent them from getting their money.

A boost in interest rates this close to the Y2K switchover would have added an element of uncertainty that analysts said the Fed wants to avoid.