Fed holds interest rates for fourth time

The federal funds rate will stay at 1.75 percent, its lowest level since 1961. The funds rate is the interest that banks can charge each other for overnight loans.

The Fed said recent data indicates that the economy is moving steadily towards a recovery.

"The information that has become available since the last meeting of the (Federal Open Market) Committee confirms that economic activity is continuing to increase," the Fed said in a statement. The Open Market Committee is the policy arm of the Federal Reserve.

But the Fed also said that the economy is recovering at a more moderate pace than before and that it still remains unclear when stronger growth will return.

"Both the upward impetus from the swing in inventory investment and the growth in final demand appear to have moderated," the central bank said. "The Committee expects the rate of increase of final demand to pick up over coming quarters, supported in part by robust underlying growth in productivity, but the degree of the strengthening remains uncertain."

These words of caution did not compel the committee to change its views on the future.

The Fed maintained its neutral outlook, saying the negative factors affecting the economy are balanced by the positive signs that point toward growth. This means that based on the information available, the Fed is more likely to hold on rates in the future.

Wall Street largely expected the Fed to hold rates steady this time, and believes that it will start to raise rates later in the year as the economy gets stronger.

The Fed took an ax to interest rates last year as the economy slid toward a recession and enacted a series of 11 cuts, including three that were unscheduled.

However, recent economic data have indicated that the U.S. economy has begun to pick up some momentum.

The Gross Domestic Product (GDP), the value of all U.S. goods and services, fell 1.3 percent in the third quarter of 2001 and grew 1.7 percent in the fourth quarter. The government reported last month in a preliminary release that GDP in the first quarter of 2002 rose 5.6 percent.

The Commerce Department will release final GDP figures this Thursday and economists expect that GDP will be revised slightly to 5.5 percent.

The housing market has also shown strong growth during a sluggish economy, in part because low interest rates have encouraged homebuyers to come out in force.

The Commerce Department said Wednesday that sales of new homes rose 8.1 percent in May to an annual rate of 1.03 million from a revised 951,000 in April and 884,000 in May 2001. The figure is the highest since the government began tracking nationwide sales in 1963.

But all is not good news; consumer confidence has slipped over the past few months. Economists see confidence as a measure of consumers' willingness to open up their wallets, since roughly two-thirds of U.S. economic activity depends on consumer spending.

The Conference Board reported Wednesday that its monthly index of consumer confidence dropped to 106.4 in June from a revised 110.3 in May. It was the lowest level since February's 95.0.

The Fed stance on interest rates now is opposite from its policy during the boom times of 1999 and 2000. It raised the funds rate six times for a total increase of 1.75 percentage points to a high of 6.5 percent in May, and increased the discount rate five times, to 6 percent, an increase of 1.5 percentage points.

The Fed's primary mission is to contain inflation, and its main tool is interest rates. When it believes the economy is growing at a rate that could increase inflation pressure, it often raises rates, which increases the cost of borrowing money and can pinch corporate financial activity.

But the Fed lowers rates when the economy seems headed for trouble. Decreasing interest rates makes it less costly for businesses to finance expansion plans and increases the incentive to borrow money, which can spark economic growth. Lower rates can result in more stable stock prices as well, because interest-paying investments become less attractive.

The Fed's policy-making committee will meet again Aug. 13.