Fed Holds Interest Rates Steady, Sees Inflation Moderating

The Federal Reserve left interest rates unchanged Wednesday while saying that the economy and inflation appeared to be growing moderately.

The central bank voted to leave the federal funds rate, the interest that banks charge each other, at 5.25%, where it has been since last June.

"Overall, the economy seems likely to expand at a moderate pace over coming quarters," the Fed said in its statement. "Some tentative signs of stabilization have appeared in the housing market."

On inflation, the Fed said that "readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time. However, the high level of resource utilization has the potential to sustain inflation pressures."

The rate action was supported by a unanimous 11-0 vote of the Federal Open Market Committee, the panel of Fed board members in Washington and regional bank presidents who meet eight times a year to set interest rates.

At the previous four meetings, Jeffrey Lacker, the president of the Richmond Fed regional bank, had dissented in favor of a further boost in rates. However, he is not a voting member of the FOMC this year.

The action means that banks' prime lending rate, the benchmark for millions of consumer and business loans, will remain unchanged at 8.25%.

Capping a string of reports showing a stronger-than-expected economy, government data released early on Wednesday showed U.S. output grew at a surprising 3.5% annual rate in the final quarter of 2006, a solid step up from the third quarter's 2%.

That and other economic indicators support the Fed's view that a housing slowdown will not cripple the rest of the economy while steady if sluggish growth tamps down inflation.

Wednesday's data buttressed the Fed's expectations of moderating price pressures. The Fed's favorite measure of inflation excluding food and energy eased to 2.1% in the fourth quarter from 2.2% in the July-September quarter, the Commerce Department report showed.

Fed policy-makers are thought to want the rise in core prices to stay between 1% and 2% over 12 months.

Analysts had been scaling back bets that the Fed would cut rates early, if at all, in 2007, even before the strong fourth-quarter GDP number.

The U.S. central bank raised the benchmark federal funds rate to the current level in June when it delivered the last of 17 straight quarter-percentage point increases.

At its previous meeting on Dec. 12, Fed policy makers noted substantial cooling in housing markets and added that recent economic data had been mixed.

But the overall picture has brightened since then, as hiring and new-home construction and sales have been surprisingly strong and consumer sentiment has improved.