Encouraged Fed leaves interest rates steady

WASHINGTON -- The Federal Reserve, noting encouraging signs that the economy is working through a "soft spot," left interest rates unchanged Tuesday and signaled that November's rate cut may turn out to be the last one needed for recovery.

The Fed decision to leave its benchmark for overnight bank loans at a 41-year low of 1.25 percent means that Americans will be able to keep borrowing at the lowest interest rates in decades on everything from auto loans to home equity loans.

Because of the Fed decision, banks' prime lending rate, the benchmark for millions of consumer and business loans, will remain at 4.25 percent, its lowest point since May 1959.

The central bank struck a more positive tone about the economy in the brief statement announcing its decision than in November when it had cited rising concerns about economic weakness stemming from increased "geopolitical risks" of a possible war with Iraq.

In Tuesday's statement, the Fed said economic signs since then "are not inconsistent with the economy working its way through its current soft spot."

The central bank expressed the belief that the already low level of interest rates, coupled with continued strong gains in U.S. workers' productivity, was laying the groundwork for a sustainable economic rebound.

Many analysts read the decision to leave rates unchanged and the more positive tone to the statement as a clear indication that the central bank believes it has done enough to guard against a double-dip recession.

"The Fed is pretty much done for this cycle unless there is some major unforeseen disruption to the economy such as a messy war in Iraq," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

Wall Street took the Fed's decision to leave rates unchanged, which had been widely expected, in stride. The Dow Jones industrial average rose 100.85 points to finish the day at 8,574.26 as bargain hunters went shopping for stocks following a 458-point slide in the Dow over the past seven sessions.

The Fed, which aggressively cut rates 11 times in 2001 as it struggled to deal with the country's first recession in a decade and then the economic fallout from the terrorist attacks, had left its fund rate unchanged through most of this year, until the half-point cut on Nov. 6.

Many analysts said given the fact that inflation continues to be held in check, the central bank could well leave rates at the current low level for some time to come, giving the economy a chance to mount a sustained rebound.

"We believe the Fed is done easing and will remain on hold through the end of 2003," predicted Gerald Cohen, senior economist at Merrill Lynch in New York.

The Fed may not feel any urgency to cut rates further in light of the preparations being made by President Bush to push Congress to pass a third economic stimulus package with an expected price tag of as much as $300 billion for tax cuts and other measures to bolster economic growth.

In an effort to get a stronger team to sell the tax cuts to Congress, Bush on Friday ousted Treasury Secretary Paul O'Neill, who had in recent months expressed doubts that another round of across-the-board cuts would be needed.

Many analysts had called on the administration to put forward a new stimulus package out of concern that the Fed was running out of room to stimulate further borrowing demand with interest rates at such low levels.

While analysts did not totally rule out another Fed rate reduction, of possibly a quarter point at its next meeting on Jan. 28-29, they said it would probably take something like a big jump in the unemployment rate to trigger that outcome.

They noted that the Fed left rates unchanged this week even after last Friday's report that the jobless rate had returned to an eight-year high of 6 percent in November.

"While the economy may be somewhat weak, the recovery remains on track," said Kurt Karl, chief economist at Swiss Re in New York.

Many analysts believe after slowing to an anemic growth rate of around 1 percent in the current quarter, economic growth will rebound to close to 3 percent in the first part of 2003.

"I think the Fed policy-makers feel that they have really done enough to try and restore the economic recovery and over time their policy will allow growth to return it its full potential," said Carl Tannenbaum, chief economist of LaSalle Bank.

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