Fed holds off on rate increase

MARTIN CRUTSINGER THE ASSOCIATED PRESS

WASHINGTON -- Americans can enjoy some of the lowest interest rates in four decades a bit longer. The Federal Reserve passed up a chance Tuesday to raise rates but put the country on notice to expect increases sooner rather than later.

In their most optimistic comments on economic revival, Federal Reserve Chairman Alan Greenspan and his colleagues said recent data indicated the economy was "expanding at a significant pace."

Because of that, the Fed changed the wording of the portion of its statement that signals possible future activity away from one tilted toward misgivings about economic weakness. That means the Fed now sees an equal balance in future risks between economic weakness and inflation.

Analysts saw this wording switch as the Fed's first step toward rate increases as the rebound from the country's first recession in a decade gains momentum.

"The Fed is telling us that the recovery is under way, so we have to start working on controlling inflation," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

Rate increase

Economists were split on when Fed rate increases might start. Some predicted an initial quarter-point increase as early as the Fed's next meeting, May 7.

Others said the rate increases probably will be delayed until the June meeting or perhaps the August discussions, depending on when the unemployment rate peaks and starts to come down.

The recession, which began in March 2001 and was exacerbated by the September attacks, pushed the jobless rate to a high of 5.8 percent in December. Unemployment has declined for two months to 5.5 percent in February, but many economists still believe the jobless rate will start rising again and peak around 6 percent during the summer.

"If the unemployment rate edges up during the next couple of months, as seems likely, the Fed probably won't tighten until August," said Bruce Steinberg, chief economist at Merrill Lynch, saying it would be politically touchy for the central bank to start raising rates to slow the economy as unemployment increased.

The Fed's decision Tuesday left its target for the Fed funds rate, the interest that banks charge each other, at a 40-year low of 1.75 percent, where it has been since Dec. 11.

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On the Net: Federal Reserve: http://www.federalreserve.gov

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