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Fed holds interest rates steady

Wednesday, January 30, 2002

Associated Press WriterWASHINGTON (AP) -- Amid signs the worst of the recession may be over, the Federal Reserve left a key interest rate unchanged Wednesday, ending a yearlong stretch of uninterrupted credit easing.

After 11 consecutive rate reductions last year, Fed Chairman Alan Greenspan and his colleagues opted to keep the federal funds rate -- the interest that banks charge each other on overnight loans -- at 1.75 percent, the lowest level in 40 years. The decision was announced after a two-day closed-door meeting.

"Signs that weakness in demand is abating and economic activity is beginning to firm have become more prevalent," the Fed said in a statement explaining its decision. "With the forces restraining the economy starting to diminish ... the outlook for economic recovery has become more promising."

Blue chip stocks rallied after the Fed's announcement, with the Dow Jones industrial average gaining back part of Tuesday's big loss.

Commercial banks' prime lending rate, the benchmark for millions of consumer and business loans, has been reduced in lockstep with the Fed moves and continues at 4.75 percent, a level last seen in November 1965.

The Fed began cutting rates on Jan. 3, 2001, and ordered its last rate reduction on Dec. 11, its final meeting of the year. Those rate reductions were designed to revive the economy, which was ailing even before it slid into recession in March.

"There's no use tossing more coal onto a fire that has been exhibiting a warmer glow," said economist Richard Yamarone of Argus Research Corp.

Even though the Fed opted to hold rates steady Wednesday, it left the door open to further rate reductions if necessary.

"The degree of any strength in business capital and household spending, however, is still uncertain," the Fed said.

Still, many economists, believing the economy is on the mend, are not forecasting additional rate reductions.

"For the foreseeable future we should see stability in interest rates even though the economic recovery clearly has begun," said Wells Fargo's chief economist, Sung Won Sohn.

Many economists expect the 11 interest-rate cuts by the Fed last year will pave the way for the economy to return to a healthy rate of growth in the second half of this year.

There are already signs that the economy may be seeing better days ahead.

Defying predictions of another negative quarter, the economy managed to eke out a 0.2 percent rate of growth in the final three months of last year, with most of the strength coming from brisk spending by consumers and government, the Commerce Department reported Wednesday.

The small increase in the broadest measure of the economy, the gross domestic product, could mean that economists will date the end of the recession around the end of last year or the beginning of this year.

Many economists had predicted that the economy, which shrank at a rate of 1.3 percent in the third quarter, would decline again at a rate of around 1 percent in the fourth quarter.

President Bush called the gain a positive sign but warned that the country could not take continued growth and job creation for granted. He repeated the call made in his State of the Union message Tuesday night for Congress to quickly pass his economic stimulus plan.

Manufacturing, hardest hit by the slump, could be turning a corner, recent economic reports suggest. Orders to U.S. factories for big-ticket goods rose by 2 percent in December, the government said Tuesday. The Institute for Supply Management earlier this month reported stronger manufacturing activity in December, a sign that the sector was beginning to emerge from a 17-month slump.

And the psyche of consumers, the lifeblood of the economy, appears to be improving, too, after having been shaken by the terrorist attacks. The Conference Board reported Tuesday that consumer confidence rose for the second straight month in January, getting back above its pre-Sept. 11 level for the first time.

In testimony to Congress last week, Greenspan delivered a more upbeat assessment of the economy, noting scattered signs of an economic revival.

He did not include a warning he had made in San Francisco on Jan. 11 that the country continued to face significant economic risks, an omission that prompted many economists to move from predicting a quarter-point rate cut in January to a forecast that the Fed would leave rates alone.

Once the Fed stops cutting interest rates, financial markets often begin immediately to worry about when rate increases might begin. Most economists believe that won't occur until the second half of this year, and then they are looking for perhaps two or three quarter-point increases.

With the nation's unemployment rate now at 5.8 percent and expected to rise in the coming months, economists said Fed policy-makers will be keeping a close eye on the behavior of consumers, whose spending accounts for two-thirds of all economic activity.

----On the Net:

Federal Reserve: http://www.federalreserve.gov

BC-Fed-Interest Rates, 3rd Ld-Writethru, a0642-43-44-46,800

Fed holds interest rates steady, cites signs economic activity is beginning to firm

EDS: Combines pvs, INSERTING graf 4, The stock, with market

By JEANNINE AVERSA

Associated Press WriterWASHINGTON (AP) -- Amid signs the worst of the recession may be over, the Federal Reserve left a key interest rate unchanged Wednesday, ending a yearlong stretch of uninterrupted credit easing.

After 11 consecutive rate reductions last year, Fed Chairman Alan Greenspan and his colleagues opted to keep the federal funds rate -- the interest that banks charge each other on overnight loans -- at 1.75 percent, the lowest level in 40 years. The decision was announced after a two-day closed-door meeting.

"Signs that weakness in demand is abating and economic activity is beginning to firm have become more prevalent," the Fed said in a statement explaining its decision. "With the forces restraining the economy starting to diminish ... the outlook for economic recovery has become more promising."

The stock market rallied after the Fed's announcement, with the Dow Jones industrial average gaining back part of Tuesday's big loss.

Commercial banks' prime lending rate, the benchmark for millions of consumer and business loans, has been reduced in lockstep with the Fed moves and continues at 4.75 percent, a level last seen in November 1965.

The Fed began cutting rates on Jan. 3, 2001, and ordered its last rate reduction on Dec. 11, its final meeting of the year. Those rate reductions were designed to revive the economy, which was ailing even before it slid into recession in March.

Even though the Fed opted to hold rates steady on Wednesday, it left the door open to further rate reductions if necessary.

"The degree of any strength in business capital and household spending, however, is still uncertain," the Fed said.

Still, many economists, believing the economy is on the mend, are not forecasting additional rate reductions.

Many economists expect the 11 interest-rate cuts by the Fed last year will pave the way for the economy to return to a healthy rate of growth in the second half of this year.

There are already signs that the economy may be seeing better days ahead.

Defying predictions of another negative quarter, the economy managed to eke out a 0.2 percent rate of growth in the final three months of last year, with most of the strength coming from brisk spending by consumers and government, the Commerce Department reported Wednesday.

The small increase in the broadest measure of the economy, the gross domestic product, could mean that economists will date the end of the recession around the end of last year or the beginning of this year.

Many economists had predicted that the economy, which shrank at a rate of 1.3 percent in the third quarter, would decline again at a rate of around 1 percent in the fourth quarter.

President Bush called the gain a positive sign but warned that the country could not take continued growth and job creation for granted. He repeated the call made in his State of the Union message Tuesday night for Congress to quickly pass his economic stimulus plan.

Manufacturing, hardest hit by the slump, could be turning a corner, recent economic reports suggest. Orders to U.S. factories for big-ticket goods rose by 2 percent in December, the government said Tuesday. The Institute for Supply Management earlier this month reported stronger manufacturing activity in December, a sign that the sector was beginning to emerge from a 17-month slump.

And the psyche of consumers, the lifeblood of the economy, appears to be improving, too, after having been shaken by the terrorist attacks. The Conference Board reported Tuesday that consumer confidence rose for the second straight month in January, getting back above its pre-Sept. 11 level for the first time.

In testimony to Congress last week, Greenspan delivered a more upbeat assessment of the economy, noting scattered signs of an economic revival.

He did not include a warning he had made in San Francisco on Jan. 11 that the country continued to face significant economic risks, an omission that prompted many economists to move from predicting a quarter-point rate cut in January to a forecast that the Fed would leave rates alone.

Once the Fed stops cutting interest rates, financial markets often begin immediately to worry about when rate increases might begin. Most economists believe that won't occur until the second half of this year, and then they are looking for perhaps two or three quarter-point increases.

With the nation's unemployment rate now at 5.8 percent and expected to rise in the coming months, economists said Fed policy-makers will be keeping a close eye on the behavior of consumers, whose spending accounts for two-thirds of all economic activity.

----On the Net:

Federal Reserve: http://www.federalreserve.gov


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