Fed Concerned About Growth and Inflation

Joe Stevens, vice president of floor operations for Credit Suisse, looks at television monitors in his booth on the floor of the New York Stock Exchange as the Fed Interest rate decision is announced, Wednesday, March 21, 2007. The Federal Reserve left a key interest rate unchanged at 5.25 percent on Wednesday while taking note of the recent weaker economic performance and higher inflation pressures. (AP Photo/Richard Drew) (Richard Drew - AP)

WASHINGTON -- Federal Reserve Chairman Ben Bernanke and his colleagues are still worried about inflation, even while hinting that an interest rate cut may be needed to help boost a weak economy.

That suggestion of a change in thinking on interest rates was contained Wednesday in the Fed's latest statement on the economy. Although the Fed made just a slight change in wording from previous statements, it was enough to trigger celebrations on Wall Street.

Investors pushed stocks higher on the belief that the central bank was getting ready to rescue the faltering economy by cutting interest rates.

Private economists, however, weren't so definite in their own reading of the Fed's message.

Many saw the wording change as, at best, a small baby step toward considering rate cuts. But they said any actual reduction was still months away.

The Fed tweaked its policy statement on Wednesday, but it did not change interest rates. For the sixth consecutive meeting, the central bank left its key policy tool, the federal funds rate, unchanged at 5.25 percent.

It has been at that level since June 2006 when the central bank capped a two-year campaign to tighten interest rates with a 17th quarter-point move.

The decision Wednesday means that banks' prime lending rate, the benchmark for millions of consumer and business loans, will remain unchanged at 8.25 percent.

While the Fed has not changed interest rates in nine months, it has continually signaled during that time that it stood ready to raise rates if inflation pressures did not subside.

But in the statement Wednesday, the Fed dropped the wording about possible "additional firming," the Fed's code for rate increases. Instead, it talked about "future policy adjustments," a phrase that could be interpreted as either rate hikes or rate cuts.

And it said those adjustments will depend on the "outlook for both inflation and economic growth" in the months ahead.

That was enough to cause a big rally on Wall Street, where investors are eager to see rate cuts as a way to ease concerns that the country could slip into a recession this year.