Fed holds key short-term rate steady to keep economy moving

From staff and wire reports

The Federal Reserve held a main short-term interest rate at a 46-year low Tuesday in an attempt to keep the economy humming.

Fed chairman Alan Greenspan and his Federal Open Market Committee colleagues -- the group that sets interest rate policy in the United States -- left the federal funds rate unchanged at 1 percent, where it has been since last June. The funds rate is the overnight bank loan rate and the Fed's primary tool for influencing the economy by affecting many banks' prime lending rates.

Steve Taylor, president of First Missouri State Bank in Cape Girardeau, said that although the short-term rate doesn't directly affect mortgage rates, it will affect money savers and those people, mostly seniors, who draw income off of interest. They will have continue to wait for their rates to rise.

Taylor's counterpart, Roger Tolliver at Commerce Bank in Cape Girardeau, said this stay of the short-term rate will benefit businesses and those with car and home equity loans. They can continue to borrow money at a low rate.

However, Taylor also said that the mortgage rates -- which are based on a long-term rate and are still relatively low -- are trending upward. That, he said, is a sign that investors are anticipating a rate increase in the near future.

Indeed when making their announcement, Fed policy-makers dropped a pledge that they had made at their previous meetings this year in January and March to be patient in ordering any possible rate increases. Economists are likely to view that as another move by the Fed to begin to prepare Wall Street and Main Street for an eventual rate increase.

Barry Randolph, president of Wood and Huston Bank in Cape Girardeau, said he expects the Fed to make that raise later this summer. He said he sees the decision to hold the short-term rate now is a sign that the inflation outlook is still low.

Economy recovering"The economy is starting to chug along," Randolph said, "but it is still in the early stages of recovery."

Tolliver said his company expects the rate to go up as soon as June, but he hopes the Fed will use prudence when instituting the raise.

"They need to be careful not to go up too much too quick," Tolliver said. "They don't need to put the brakes on the economy."

The Fed said that with inflation remaining low and companies operating below capacity, "the committee believes that policy accommodation can be removed at a pace that is likely to be measured."

The Fed's decision Tuesday to leave the fund rate alone means commercial banks' prime lending rate for many short-term consumer and business loans remains at 4 percent, the lowest level in more than four decades. Extra-low borrowing costs have helped to support economic growth by motivating consumers and businesses to spend.

The Fed, expressing a more upbeat tone, said the economy is "continuing to expand at a solid rate and hiring appears to have picked up." The comment on the labor market was more optimistic than at the Fed's previous meeting in March, when it expressed disappointment that new hiring has lagged.

In another change, Fed policy-makers made no mention of the threat of deflation and said that although inflation has moved higher, "long-term inflation expectations appear to have remained well contained."

The economic recovery has gained traction since Greenspan and his colleagues convened last on March 16 to discuss interest rate policy.

Importantly, a government report issued after the Fed's March meeting showed that the economy, after months of sluggish payroll gains, added 308,000 jobs in March, the most in four years. While that raised hope that the jobs market may be turning an important corner, economists say steady and solid gains need to be made in coming months for confirmation that the corner has been turned.

Staff reporter Tony Rehagen contributed to this report.