New York, NY, September 20, 2006--Surprising no one, the Federal Reserve held its overnight federal funds rate steady at 5.25 percent, the rate reached in June after 17 straight increases.
Voting against keeping rates steady was Richmond Fed president Jeffrey Lacker, who preferred an increase of 25 basis points in the federal funds target, according to the FOMC statement.
"It is probably going to surprise markets by being a little bit more hawkish because it's clear that there are still some very vocal hawks on the FOMC. So I think it will support the dollar as the market has got ahead of itself talking about rate cuts," said Lara Rhame, senior currency strategist, Credit Suisse in New York.
US Treasury notes, meanwhile, pared gains. The benchmark 10-year Treasury note was down 1/32 to yield 4.74 percent.
"The Fed left interest rates unchanged and the bond market's immediate reaction to that (some short-lived, modest selling) was not surprising. Based on what the Fed has done, the inflation data out there, and slowing economic growth, it's a good sign that interest rates won't go higher," said Bill Emerson, chief executive officer, at Quicken Loans, Livonia Michigan.
The US currency has dropped about 7 percent this year against the euro on speculation the Fed would end its campaign of lifting borrowing costs as the European Central Bank continues to raise its benchmark, dimming the allure of dollar-denominated assets.
Reports this week showed US inflation and housing cooling.
`The Fed can afford to keep rates on hold as inflation risks have declined," said Mike Moran, senior currency strategist at Standard Chartered Bank in New York, before the Fed decision.
"It doesn't provide a good reason to buy the dollar with a dovish Fed outlook. You will see further weakness in the dollar."
The dollar weakened to $1.2722 per euro at 2:24 pm in New York, from $1.2678 late Tuesday. It fell to 117.19 yen from 117.76 Tuesday.
"Inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations and the cumulative effects of monetary policy actions," the Fed said in its statement.
Government reports Tuesday showed housing construction in the US fell to a three-year low last month and a measure of wholesale prices dropped, increasing speculation the Fed is done raising rates.
