Fed keeps interest rates at 45-year low

WASHINGTON -- The Federal Reserve left a key interest rate at a 45-year low on Tuesday and pledged anew to keep rates down for a "considerable period."

However, Wall Street investors didn't like hints from the Fed that the period of easy money may be drawing to a close, even if the first rate increases are still months away.

Dropping Dow

The Dow Jones industrial average, which in early trading crossed the psychologically important 10,000-point level for the first time in 18 months, lost altitude after the Fed's afternoon announcement and finished the day at 9,923, down 41 points for the day.

The Fed in its statement said that it was leaving the federal funds rate, the interest that banks charge on overnight loans, at 1 percent, where it has been since the last rate change, a quarter-point cut last June.

What caught investors' attention was that the statement released at the Fed's final meeting of the year struck a noticeably more upbeat tone about economic prospects than it had in recent months, suggesting that the policy-makers' three-year period of monetary easing may be nearing an end.

The Fed noted that the economy was expanding briskly, reflecting the torrid 8.2 percent growth rate turned in for the July-September quarter. The Fed also said the labor market "appears to be improving modestly," reflecting the fact that after a prolonged period of job losses, the economy has gained nearly 300,000 jobs over the past four months.

Federal Reserve chairman Alan Greenspan and his colleagues, who in May had raised concerns about a possible destabilizing bout of deflation -- falling prices -- said Tuesday that the prospect of inflation going lower had diminished in recent months and was now about equal with the possibility that inflation could increase.

The more upbeat comments about the economy and the diminished worries about falling inflation led analysts to believe that while an actual Fed interest rate increase is still some months away, the central bank is beginning to prepare the markets for such a move.

"The Fed is definitely stepping in the direction of preparing the market for an eventual tightening of monetary policy," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

Sohn said the central bank will probably drop its promise to keep rates low for a "considerable period" at its March meeting next year. The Fed has been using that phrase since last August as a way to assure investors that the absence of inflationary pressures meant that it could keep rates lower for a longer period of time than in past recoveries.

Sohn said he did not anticipate an actual hike in interest rates until after the November presidential election because of the Fed's reluctance to change rates during an election period for fear of becoming an issue in the campaign.

Other analysts, however, took the more positive tone in the Fed's statement as an indication that the central bank may feel the need to move more quickly than late next year to start raising rates.

"The Fed made a few more changes in their statement than I was expecting and I think that points to an earlier, rather than later, increase in rates," said David Wyss, chief economist at Standard & Poor's in New York.

He said that the most likely time for a Fed rate increase was at the June meeting, which would give the central bank time to change the direction of monetary policy in early summer rather than perhaps being forced to move in the fall by economic events in the closing weeks of a presidential campaign.

Still, even a June increase in rates would be six months away, meaning that consumers would be able to enjoy the lowest interest rates in decades for some time to come. Banks' prime lending rate, the benchmark rate for millions of consumer and business loans, has been at 4 percent since the Fed's last rate change in June.

The low interest rates in the United States are viewed as one of the factors pushing the U.S. dollar down in value against other currencies. In recent weeks, the dollar has hit record lows in relation to the euro, the 12-nation European currency launched in January 1999.

Analysts said that at the moment the Fed is probably not concerned about the dollar's fall, given that the decline has been orderly and a weaker dollar will make U.S. exports more competitive and thus help to lower the country's soaring trade deficit.

The Fed decision to leave rates unchanged was approved on an unanimous vote of the Federal Open Market Committee, the panel of seven Fed board governors and five Fed regional bank presidents, who meet eight times a year to set interest rates.