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Fed leaves interest rates unchanged

The U.S. central bank holds on interest rates for the third time this year, maintaining its belief that the economy is poised for a rebound.

The Federal Reserve on Tuesday left interest rates unchanged for the third time this year, maintaining its belief that the U.S. economy will rebound--even though the specific timetable is unclear.

The federal funds rate will stay at 1.75 percent, its lowest level since 1961, and the discount rate will remain at 1.25 percent. The funds rate is the interest that banks can charge each other for overnight loans; the discount rate is what the Fed charges banks to borrow.

In explaining its decision, the Fed said recent data show hopeful signs of improvement in an economy that has been working its way out of a recession.

"The information that has become available since the last meeting of the Committee confirms that economic activity has been receiving considerable upward impetus from a marked swing in inventory investment," the Fed said in a statement.

But the Fed did caution investors, saying that the timing for a recovery remains murky, and that the fate of the economy depends on strong consumer demand during the coming months.

"Nonetheless, the degree of the strengthening in final demand over coming quarters, an essential element in sustained economic expansion, is still uncertain," the central bank said.

The Fed also 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. In testimony to Congress last month, Greenspan said the central bank has a measure of flexibility in choosing the time when it needs to raise rates, since the danger of inflation is low.

"Prospects for low inflation and inflation expectations in the period ahead mean that the Federal Reserve should have ample opportunity to adjust policy to keep inflation pressures contained once sustained, solid, economic expansion is in view," he said, adding that the prospects for the U.S. economy remain positive.

"The strength of the economic expansion that is under way remains to be clarified...Still, there can be little doubt that prospects have brightened. Spending in the household sector has held up well, and some signs of improvement are evident in business profits and investment."

The Fed took an ax to interest rates last year, enacting a series of 11 cuts, including three that were unscheduled.

Recent economic data have indicated that the U.S. economy is coming out of a recession.

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. Advance estimates for the first quarter of 2002 indicate that GDP grew 5.8 percent.

The Commerce Department will release updated GDP figures May 24.

The Fed took a different stance on interest rates 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 meets again June 25 and June 26.