Fed Leaves Interest Rates Unchanged --- Low Inflation Is Decisive; Economists Are Divided On Rise in Near Future
WASHINGTON -- The Federal Reserve left its key short-term interest rate unchanged, confirming that its fears of imminent inflation have subsided. But economists are divided over whether the central bank will still have to tighten monetary policy in the coming months to damp growth.</br></br>Yesterday's meeting of the Federal Open Market Committee was the second consecutive time that Fed officials chose to leave monetary policy alone after pushing through a controversial quarter-point increase in the federal-funds rate in March. The Fed's target for the federal-funds rate, or the rate at which banks lend to each other overnight, remains at 5 1/2%.</br></br>Although the inaction was widely anticipated, the stock market rallied after the decision was disclosed. The Dow Jones Industrial Average, down nearly 20 points just before the 2:15 p.m. announcement, ended the day up 73.05 points to close at 7795.38. The benchmark 30-year Treasury bond gained 12/32, or about $3.75 for a $1,000 bond, to close at 98 27/32. The yield fell to 6.71% from 6.73%.</br></br>The Fed's decision to keep interest rates at current levels stems from two recent economic developments. First, numerous signs indicate that economic growth in the second quarter slowed from the red-hot 5.9% pace of the first period. Just yesterday, for example, the Commerce Department reported that factory orders fell 0.7% in May, reversing a 1.4% jump in April.</br></br>The second trend giving comfort to the Fed has been inflation's moderation, despite strong growth earlier in the year and an unemployment rate below 5% -- a level most mainstream economists consider likely to trigger higher wages and prices.