Wednesday, May 9, 2007

Fed Leaves Key Interest Rates Unchanged

WASHINGTON, May 9 — The Federal Reserve acknowledged today that the economy is slowing but offered little hint that it is ready to lower interest rates anytime soon.

The central bank kept the benchmark interest rate on overnight loans between banks at 5.25 percent — the same level it has been since the Fed began its “pause” almost a year ago.

It also reiterated its basic stance of the last year, saying that inflation remains a bigger worry at the moment than slowing economic growth. “Core inflation remains somewhat elevated,” the Fed said in a statement accompanying its decision. “Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.”

The tilt suggested that the central bank will wait at least until after its next meeting in June, and perhaps much longer, before actually reducing the cost of borrowing.

Fed officials have openly acknowledged that economic indicators are flashing a bewildering mix of green and red. Economic growth slowed sharply in the first quarter of this year to an annual pace of 1.3 percent, the slowest pace in four years, and job creation in April slowed to its lowest level in two years.

But unemployment remains well below 5 percent, a level that many economists consider tantamount to full employment, and consumer spending has remained surprisingly strong.

Fed officials have openly acknowledged that they face greater uncertainty in both directions — the possibility of that growth will slow more expected and the possibility that prices and wages will climb faster than expected.

Amid that mixed economic signals, the Fed seemed determined to keep its options open and to avoid any implied promises about its next move on interest rates.

The Fed is now nearing the one-year mark of standing pat. After raising the overnight federal funds rate at every policy meeting from June 2004 to June 2006, the central bank’s ostensibly temporary pause in rate changes has a good chance of lasting until this fall or even longer.

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