GO
Loading...

Fed Keeps Rates Steady, Says Inflation Is Main Worry

Reuters
Wednesday, 9 May 2007 | 3:08 PM ET

The U.S. Federal Reserve on Wednesday held benchmark interest rates steady at 5.25% for a seventh straight meeting and again said its main worry is that inflation will fail to moderate.

The widely expected decision by the U.S. central bank's Federal Open Market Committee keeps the overnight federal funds rate target at the level it hit in June after 17 straight quarter-percentage point increases.

Fed Decision
Analysis of the Fed's decision on rates and its impact on the economy, with Steve Liesman, CNBC sr. economics editor; Ron Insana, CNBC sr. analyst; Bob Pisani, CNBC market floor reporter; Rick Santelli, CNBC bond market reporter and CNBC's Erin Burnett & Hampton Pearson

In a statement outlining its decision that hewed closely to its last announcement in late March, the Fed nodded to recent sluggish economic growth, but held to its view that the economy was likely to expand at a moderate pace in coming quarters.

It also said: "Core inflation remains somewhat elevated."

"Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures," the Fed said, in a reference to tight labor markets.

Inflation Worries

"The committee's predominant policy concern remains the risk that inflation will fail to moderate as expected," it said.

The restatement of the Fed's inflation concerns pushed down prices for U.S. government bonds, gave a lift to the dollar and weighed on stocks as traders saw it suggesting less likelihood of rate cuts later in the year than some had thought.

"They're basically saying that the economy has not weakened enough to reduce that inflation risk," said Gary Thayer, chief economist at A.G. Edwards & Sons in St. Louis.

The U.S. central bank has held rates steady since last June in the hope that sub-par growth would lead to cooler inflation as higher unemployment takes the pressure off employers to raise wages.

Recent signs show non-food, non-energy inflation easing somewhat, while a slowdown in jobs growth and slight rise in the unemployment rate suggest the labor market is softening.

Still, signals on the U.S. economy's health have been mixed.

The economy expanded at a tepid 1.3% annual rate in the first quarter and the housing market remains in the doldrums, raising some fears that the expansion might stall.

Some Positive Signs

At the same time, worries about growth have been tempered by signs that factory activity has begun to revive and that business spending may be picking up.

Meanwhile, despite encouraging signs that core inflation may be easing, high gasoline prices and rising import costs on the back of a weak dollar point to the possibility of persistent upward pressure on prices.

While the jobless rate moved slightly higher to 4.5% in April, it is still at a level that is likely to keep concerns over the potential for wage-induced inflation alive at the Fed.

At its last rate-setting session in March, the Fed changed the wording of its statement to reflect greater uncertainty about the outlook for both inflation and growth.

In a nod to that uncertainty, policy-makers at that meeting dropped an explicit reference to the possibility of future rate increases that had been contained in prior announcements.

Featured

Contact U.S. News

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More

Don't Miss

U.S. Video