Fed Holds Rates Steady

Key rate unchanged at 5.25 percent but with the economy slowing and inflation looming, what's the central bank's next move?
By Paul R. La Monica, CNNMoney.com editor at large
October 25 2006: 3:04 PM EDT


NEW YORK (CNNMoney.com) -- The Fed held interest rates steady Wednesday and noted again that the economy was slowing, but the central bank also indicated it's still wary of inflation - a sign the Fed may not cut rates in coming months as many investors had hoped.

Federal Reserve policy-makers held their target for the federal funds rate, an overnight bank lending rate that helps determine the interest consumers pay on auto and other loans, at 5.25 percent.

The move, widely expected on Wall Street, marked the third straight time the Fed left rates alone after raising them 17 consecutive times through June of this year. But now many economists and market strategists think Fed Chairman Ben Bernanke & Co. face tougher decisions ahead.

Some argue the Fed should consider rate cuts next year in a bid to make sure the economy doesn't tumble into recession. Others who fear inflation is a more pressing threat say the Fed should start raising short-term rates again.

Again, there was dissension within the Fed on this matter.

For the third consecutive meeting, Federal Reserve Bank of Richmond President Jeffrey Lacker voted against a pause and for a quarter-point rate hike. The other 10 members of the Fed's policy-making committee voted to leave rates unchanged.

Read the Fed statement
The Fed did, however, appear to indicate it may be more worried about a slowdown. In its statement, the Fed said "economic growth has slowed over the course of the year, partly reflecting a cooling of the housing market."

That differs slightly from the language on the economy in the last statement when the central bank said that "moderation in economic growth appears to be continuing."

But the Fed added that the economy "seems likely to expand at a moderate pace" going forward.

It also kept its language about the threat of inflation, saying that "readings on core inflation have been elevated" and that "some inflation risks remain." The Fed did remove a phrase about energy prices and other commodity prices having "the potential to sustain inflation pressures."

David Kelly, an economic advisor at Putnam Investments in Boston, said the changes to the statement show the Fed is fairly satisfied with the prospects for economic growth next year as well as the inflation picture.

"This statement is an expression of increased confidence in the economic outlook," Kelly said.

As such, Kelly said he thinks the Fed will probably start cutting interest rates sometime in 2007. He does not expect the Fed to change rates at its next meeting on December 12, however.