Experts think the Fed could be finished raising U.S. interest rates
The Associated Press
Published: September 21, 2006
WASHINGTON It is looking more and more like it could be 17 and done for the Federal Reserve.
There is a growing view that after 17 consecutive rate increases, the longest stretch in Fed history, the U.S. central bank will keep rates steady for the rest of this year.
Some economists are forecasting that the next Fed move will be to cut rates, possibly as early as next spring, in response to a slowing economy and falling inflation pressures.
As widely expected, Fed Chairman Ben Bernanke and his colleagues held rates steady at Wednesday's meeting, issuing a statement that was virtually identical to the one the Fed released after its Aug. 8 meeting, the first time it paused after two years of raising rates.
The action left the federal funds rate, the interest that banks charge each other, at 5.25 percent. That meant that banks' prime lending rate, the benchmark for millions of consumer and business loans, will stay at 8.25 percent.
The vote to hold steady was 10-1 with Jeffrey Lacker, the head of the Richmond regional Fed bank, dissenting in favor of a further quarter-point hike. He had also dissented in favor of a rate hike in August.
Fed officials kept the door open to further rate increases, saying as they had in August that "some inflation risks remain." They also repeated their August view that any further rate hikes "that may be needed to address these risks" will depend on how the economy performs.
But private economists noted that all the small changes to the statement seemed to be in the direction of staying on hold and letting the current economic slowdown do the job of pushing inflation rates back down to acceptable levels.
"This was a very financial-market friendly statement," said Mark Zandi, chief economist at Moody's Economy.com. "The minor tweaks in the verbiage suggest the Fed is finished tightening."
The Fed meeting occurred against a backdrop of a number of developments that suggest the central bank's goal of having an economic slowdown take pressure off inflation was unfolding.
Oil prices, which had soared above $77 per barrel in mid-July, have fallen to close to $60 per barrel. That has helped push down gasoline prices from record highs above $3 per gallon to around $2.50 per gallon nationwide.
The favorable development on energy is already showing up in the government's inflation statistics with both consumer and wholesale prices slowing sharply in August.
At the same time, the overall economy has slowed to a growth rate of just 2.9 percent in the spring after racing ahead at a torrid 5.6 percent pace in the winter.
Many analysts believe that growth has slowed even further in the last half of this year to a pace of around 2.5 percent.
That could translate into the Fed's hoped-for soft landing in which the economy slows enough to keep inflation under control but not so much that the country tumbles into a recession.
But one major question mark is what will happen to housing, which has sagged significantly this year. The government reported this week that new home construction plunged 6 percent in August, the fifth decline in the past six months.
The concern is that a steep decline in housing could rattle the economy much as the popping of the stock market bubble did in 2000.
"The jury is still out on a soft landing. We think we are going to succeed, but we can't be sure yet," said David Wyss, chief economist at Standard & Poor's in New York.
Wyss said he expected the Fed to remain on hold for the rest of this year and by next June, it could start cutting rates.
Zandi said he could see rate reductions as early as this spring if the core rate of inflation, which excludes food and energy, has fallen closer to the Fed's comfort zone of 1 percent to 2 percent. The Fed's preferred measure of core inflation has risen 2.4 percent over the past 12 months.
As long as the Fed stays on the sidelines, analysts predict that other interest rates set by financial markets will likely stay about where they are.
The 30-year mortgage, which hit a high this year of 6.8 percent in late July, has now fallen to 6.4 percent, according to Freddie Mac, reflecting optimism in financial markets that inflation pressures are easing and the Fed won't raise rates any more.
Many economists said they believe 30-year mortgages will hover in a range around 6.5 percent for the next 12 months.