Fed leaves interest rates alone

As expected, the Federal Reserve leaves interest rates unchanged, preferring to wait and see whether several previous rate hikes have tamed the economy and reduced the risk of inflation.

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As expected, the Federal Reserve left interest rates unchanged today, preferring to wait and see whether several previous rate hikes have tamed the economy and reduced the risk of inflation.

The Federal Open Market Committee announced that the discount rate, the interest the Federal Reserve charges banks for short-term loans, and the federal funds rate, the amount banks can charge other banks for loans, will remain at 6.5 percent and 6 percent, respectively.

In a short release, the Fed mentioned that a tight labor supply along with rising consumer and producer prices indicate a risk of inflation, but that "continuing rapid advances in productivity have been containing costs and holding down underlying price pressures."

An increase in interest rates for bank borrowing immediately raises the rates for consumers and businesses, which acts as a drag on the economy.

Recent government data has indicated that the U.S. economy is slowing without any solid evidence of inflation. The Fed has raised interest rates six times in the past year to cool an overheating economy and bring growth rates back to normal.

The economy has grown at an annual rate of more than 5 percent for the past three quarters, as shown by the gross domestic product. Many economists believe that a growth rate of 2 to 3 percent is ideal.

The current combination of a strong economy and a short supply of labor have led many analysts to conclude that companies will have to increase wages to attract employees. That can result in increased spending as well as inflation.

Recent reports have shown, however, that hourly wages are holding steady, which may have contributed to the Fed's decision to hold tight on interest rates.

"The economy is very much like a pot near a rolling boil on the stove," said Diane Swonk, chief economist at Bank One. "Even as you turn down the heat, you still run the risk of the pot boiling over, and that's how inflation works today."

Swonk and others predicted that the Fed would leave rates alone because the economy has shown some signs of slowing, while inflation has slowed. Housing construction has declined in the past few months, and prices paid by consumers and producers have remained steady.

The Fed meets again to set the course for interest rates Aug. 22.