Washington, DC, October 25, 2006--The Federal Reserve kept its benchmark interest rate steady for a third meeting in a row, predicting moderate economic growth ahead with some reason to expect easing price pressures.
The statement from the Fed's policy-setting Federal Open Market Committee seemed to imply U.S. central bank policymakers felt most of a slowdown stemming from a weak housing sector was past and that the economic expansion was on solid footing.
"The economy seems likely to expand at a moderate pace," the Fed said in five paragraphs announcing it was keeping its overnight federal funds rate target at 5.25 percent, the level reached in June after 17 straight increases since mid-2004.
The Fed said core inflation rates had been 'elevated' but it thought this should ease because there was less impact from higher energy prices, inflation expectations were contained, and prior rate rises had put a restraint on spending.
Gasoline prices have fallen sharply in recent weeks, though oil prices were on the rise again on Wednesday.
Only Richmond Federal Reserve Bank President Jeffrey Lacker, who has been pressing for higher borrowing costs, disagreed. He voted against the majority for a third straight time, the longest string of dissents since former Cleveland Fed President Jerry Jordan did so four times in 1998.
The policymakers took no options off the table, leaving room to either raise or lower rates by saying "some inflation risks remain" and that they will monitor data in coming months to judge prospects for both inflation and growth.
"There's nothing here changing the view ... that the Fed's inclination is to stand pat for some time but with a slight bias toward tightening if inflation gains hold," said Alan Ruskin, chief international strategist with RBS Greenwich Capital in New York.
"The extent and timing of any additional firming that may be needed to address these (inflation) risks will depend on the evolution of the outlook for both inflation and economic growth," the FOMC said in its statement, which closely mirrored the one accompanying its last rate announcement on September 20.
The statement, despite being little changed from the previous one, seemed to reassure investors. In futures trading, the chances the Fed will lift rates another quarter percentage point by January dropped to 10 percent from 16 on Tuesday.
Bond prices rallied in evident relief that the Fed had not struck a more hawkish tone on inflation as many market observers had suggested was possible ahead of the decision.
Higher rates hurt bond values and investors felt the Fed was, at a minimum, signaling it was not going to do anything imminently.
"The Fed remains committed to keeping inflationary pressures contained," said Kevin Flanagan, a strategist for global wealth management with Morgan Stanley in Purchase, N.Y. "You don't get a sense of urgency at this point ... that the Fed needs to take that next step and raise rates," he added.
Stock prices closed modestly higher, influenced more by corporate earnings reports than by the widely anticipated Fed decision.
There were new signs of economic cooling even before the Fed wrapped up its two-day meeting as a realtors' group reported U.S. sales of existing homes fell for a sixth straight month in September and median prices were down from a year ago.
But price pressures have stayed high despite some economic slowing and it is evident that the Fed remains wary.
The core U.S. consumer price index, which excludes food and energy, rose at a 3 percent annual rate in the first nine months of this year, well above the 2.2 percent posted for all of 2005 and outside the generally perceived 1 percent to 2 percent "comfort zone" for Fed policy-makers.
