Originally created 03/17/04

Fed holds key short-term rate steady



WASHINGTON --The Federal Reserve - keeping a close eye on the unfolding economic recovery - held a main short-term interest rate at a 45-year low Tuesday.

Fed Chairman Alan Greenspan and his colleagues left the federal funds rate unchanged at 1 percent, where it has been since June. The funds rate is the interest that banks charge each other on overnight loans and is the Fed's primary tool for influencing economic activity.

With inflation low, the Fed has leeway to hold rates at extra-low levels. "The committee believes it can be patient in removing its policy accommodation," the Fed said in language first used at its last meeting in January.

The Fed's decision comes as job growth remains slow despite an economic rebound.

The economy, after struggling to get back on its feet after the 2001 recession and terrorist attacks, finally snapped out of a funk in the second half of last year, growing at its strongest pace since early 1984. The economy is expected to grow at a healthy rate of more than 4.5 percent in the first half of this year, economists predict.

But the economy added a paltry 21,000 jobs last month - all of them in government. Private payrolls were flat. There were some 8.2 million people unemployed in February, with the average duration of 20.3 weeks without work. That marked the highest average duration of joblessness in over 20 years.

Since President Bush took office in January 2001, the economy has lost 2.2 million jobs. This loss of jobs - including those that have moved overseas - is a major issue in the presidential campaign.

Presumptive Democratic presidential nominee John Kerry points to the lackluster job growth as evidence that Bush's economic policies aren't working. Bush, meanwhile, has called on Congress to make his tax cuts permanent to create new jobs.

Some economists believe the Fed will keep rates at super low levels through this year and into 2005. They worry that if the jobs market doesn't turn around soon, consumers could turn cautious, raising the risk of an economic slowdown in the second half of this year.

Yet, others - hopeful that job growth will pick up - continue to believe that the Fed may raise rates later this year, perhaps after the elections, at the central bank's Nov. 10 or Dec. 14 meetings.

The Federal Reserve statement Tuesday on interest rates:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 1 percent.

The committee continues to believe that an accommodative stance of monetary policy, coupled with robust underlying growth in productivity, is providing important ongoing support to economic activity. The evidence accumulated over the intermeeting period indicates that output is continuing to expand at a solid pace. Although job losses have slowed, new hiring has lagged. Increases in core consumer prices are muted and expected to remain low.

The committee perceives the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation. With inflation quite low and resource use slack, the committee believes that it can be patient in removing its policy accommodation.

Voting for the FOMC monetary policy action were: Alan Greenspan, chairman; Timothy F. Geithner, vice chairman; Ben S. Bernanke; Susan S. Bies; Roger W. Ferguson, Jr.; Edward M. Gramlich; Thomas M. Hoenig; Donald L. Kohn; Cathy E. Minehan; Mark W. Olson; Sandra Pianalto; and William Poole.