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Fed Leaves Rate Unchanged, Signals Softer Outlook
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tanglinboy
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13-Dec-2006 09:43
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Good news! At least its not another rate hike! |
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lg_6273
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13-Dec-2006 07:10
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Fed Leaves Rate Unchanged, Signals Softer Outlook (Update4) By Craig Torres and Scott Lanman Dec. 12 (Bloomberg) -- The Federal Reserve kept the benchmark U.S. interest rate at 5.25 percent and suggested a softer growth outlook while continuing to note inflation risks. The Federal Open Market Committee called the cooling of the housing industry ``substantial,'' one of the few changes in language from its previous statement in October. Policy makers, who met in Washington today, predicted a moderate expansion ``on balance over coming quarters,'' rather than simply ``moderate,'' and called recent economic indicators ``mixed.'' Chairman Ben S. Bernanke still anticipates the economy will withstand the downturn in housing and manufacturing, leaving inflation as his main concern. Traders focused instead on the new language, interpreting it as a step toward interest-rate cuts next year. Bonds yields and the dollar fell. ``The only change I see is a somewhat more dovish assessment of housing,'' said Jeffrey Kleintop, chief investment strategist at PNC Wealth Management in Philadelphia, which oversees $52 billion in assets. ``For the next couple of meetings, they probably won't make any more changes, but will have plenty of opportunities early next year to guide market expectations as to when cuts may begin.'' Today's decision extends a respite from two years of rate increases that ended in June. Bernanke and most of his colleagues are counting on the economy slowing enough to cool inflation without the need to resume tightening credit. Conflicting Interpretations Speculation about a rate cut is premature, said Brian Sack, vice president at Macroeconomic Advisers LLC in Washington and a former economist at the Fed's Division of Monetary Affairs. ``The statement was not intended to be a first step towards a policy easing,'' said Sack. ``The `mixed' data and `substantial cooling' in housing have not affected their baseline view that growth will recover going forward and that inflation risks remain.'' Richmond Fed President Jeffrey Lacker cast his fourth dissent in favor of raising the overnight lending rate between banks to bring inflation down at a more rapid pace. Lacker won't vote again until 2009. Chicago Fed President Michael Moskow, who stressed the possibility of higher borrowing costs on Dec. 1, will become a voting member next year. ``Some inflation risks remain,'' the FOMC said, repeating a phrase used since June. ``The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth.'' Bernanke's Year Bernanke, 52, closed his last policy meeting of the year with core inflation higher than when he succeeded Alan Greenspan on Feb. 1. The economy has slowed and the jobless rate surprised economists by dropping to 4.5 percent, from 4.8 percent at the start of Bernanke's term. Inflation has been stubbornly elevated based on the Fed's preferred measure, an index tied to consumer spending minus food and energy. The core personal consumption expenditures price index rose 2.4 percent for the year ending October, above the tolerance zone of 1 percent to 2 percent stated by Bernanke and other officials. The October reading was just below the 2.5 percent reported in August, the fastest pace since April 1995. At the same time, the Fed's pledge to keep inflation low has kept the longer-term outlook for prices stable. Traders expect inflation to average 2.44 percent over the next five years, according to yield differences on Treasury notes and government inflation-indexed bonds. That's below 2.53 percent when Bernanke became chairman on Feb. 1. Some traders expect the Fed to cut its benchmark rate at or before the May 9 meeting, based on the price of interest-rate futures on the Chicago Board of Trade. `Holding Pattern' ``The Fed is in a holding pattern,'' said Jason Schenker, an economist at Wachovia Corp. in Charlotte, North Carolina. ``They're still concerned about inflation and those fears have not been assuaged.'' Policy makers may be waiting for results of the holiday shopping season to judge whether the housing and auto slumps are spilling over into the broader economy. Consumer spending accounts for about 70 percent of the U.S. economy. Bernanke, giving his most extensive remarks on the economy since July, said in a Nov. 28 speech that ``economic activity has, on balance, been expanding at a solid pace'' outside of the housing and auto industries. That clarification may come in the minutes of today's session, to be released on Jan. 2, or in Bernanke's testimony to Congress in February. To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net . Last Updated: December 12, 2006 16:33 EST |
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