Fed leaves interest rates at 41-year low

WASHINGTON -- The Federal Reserve decided on Wednesday to leave interest rates unchanged at a 41-year low, optimistically predicting that the feeble U.S. economy will revive once geopolitical risks -- a reference to a possible war with Iraq -- recede.

The Fed's widely expected decision means the continuation for borrowers of rates that have spurred record home sales and a wave of mortgage refinancings.

Federal Reserve chairman Alan Greenspan and his colleagues, striking an upbeat tone in their brief statement, contended that many of the economy's current problems were temporary and caused by the uncertainties surrounding possible military action in Iraq.

"Oil price premiums and other aspects of geopolitical risks have reportedly fostered continued restraint on spending and hiring by businesses," Fed policy-makers said in explaining their 12-0 decision.

"As those risks lift, as most analysts expect, the accommodative stance of monetary policy, coupled with ongoing strength in productivity, will provide support to an improving economic climate over time," they said.

Holding at 1.25 percent

The federal funds rate, the interest that banks charge each other on overnight loans, will hold at 1.25 percent. It has remained there since a half-percentage point rate cut in early November, the 12th rate reduction in an aggressive easing campaign that began in January 2001.

Banks' prime lending rate, the benchmark for millions of consumer and business loans, will keep steady at 4.25 percent, the lowest level since May 1959.

Some economists said the Fed decided to conserve what few rate cuts it has left in case further reductions are needed should an Iraqi war take a turn for the worse with a possible disruption in global oil supplies or a terrorist attack.

"The risk is that something really bad could happen in a war," said David Wyss, chief economist at Standard & Poor's in New York. "They only have five shots left and they want to conserve their ammunition for as long as possible."

If the Fed decided to move the 1.25 percent funds rate down in quarter percentage point moves, it would take five steps to reach zero.

Analysts, citing comments Greenspan made last year, said the central bank would not hesitate to push the funds rate down to that level if necessary to bolster plunging consumer and business confidence.

Wall Street investors, who have pushed stock prices down to last fall's levels, took heart from the upbeat tone of the Fed's announcement. The Dow Jones industrial average, which had been down more than 100 points in early trading, finished the day up 21.87 at 8,110.71.

The part of the Fed's statement intended to signal possible future moves was unchanged from its neutral policy stance -- indicating that economic risks were equally balanced between inflation and weak growth.

Some analysts had predicted the Fed, given Wall Street's weakness, would take a position suggesting an inclination for additional interest cuts ahead. Other analysts, though, believed the Fed did not take that step because it would indicate more pessimism about the economy's prospects than was warranted.

The Fed next meets March 18.

"If a war starts in late February or early March, the Fed won't know the outcome by their March 18 meeting," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

If the war proceeds as the Bush administration hopes and is over quickly, then Wall Street is likely to enjoy a big rally and businesses will unfreeze their investment plans. Those developments could gain momentum from President Bush's $674 billion economic proposal.

The jobless level now stands at an eight-year high of 6 percent and many analysts forecast it will hit 6.5 percent by early summer before starting to improve.