Fed Holds Interest Rates Steady
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Wednesday, January 31, 2007; 3:06 PM
Federal Reserve policymakers held short-term interest rates steady today, but indicated they remain ready to raise borrowing costs if strong economic growth fuels inflation pressures.
The central bank's top policymaking committee voted unanimously to leave its benchmark federal funds rate unchanged at 5.25 percent, where it has been since June.
The Fed announced its decision a few hours after the Commerce Department reported that the economy expanded by a strong 3.4 percent last year, despite sharp declines in home building and auto production.
Fed policymakers, in a statement issued after their meeting, noted recent signs of "somewhat firmer economic growth, and some tentative signs of stabilization . . . in the housing market."
They repeated that they expect the economy to expand "at a moderate pace" in coming months.
The Fed raised the federal funds rate, the overnight rate charged on loans between banks, steadily through the first half of last year to keep the lid on inflation. The combination of rising interest rates, climbing fuel prices and the slumping housing market caused economic growth to slow at mid-year.
Inflation surged in the spring and summer as oil prices soared to above $77 a barrel in July. But oil prices tumbled through the end of the year, causing price pressures to ease as well.
Consumer prices rose 2.8 percent last year, a slightly smaller increase than the 2.9 percent gain recorded the year before, the Commerce Department said today.
Many economists seek a sense of underlying inflation by looking at so-called core inflation, which excludes volatile food and energy prices. Core prices rose 2.1 percent in 2006, after rising 2.2 percent in 2005.
The core inflation rate last year exceeded the Fed policymakers' unofficial comfort zone of 1 to 2 percent, but the decline was what they had hoped to engineer.
"Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time," the policymakers said in their statement. However, they added that the tightness in the labor market "has the potential to sustain inflation pressures."
Many analysts predict the rate will remain steady for the rest of this year.
