Fed again leaves rates at 5.25%

WASHINGTON – Federal Reserve System policymakers today agreed to leave the federal funds rate, used for overnight loans between banks, at 5.25 percent.
The Federal Open Market Committee voted 10 to 12 in favor of leaving the rate unchanged, as it has for the past year. Chairman Ben S. Bernanke and Vice Chairman Thomas M. Hoenig both were among those favoring the status quo.
“Economic growth appears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector,” the FOMC wrote in its summary of the two-day meeting. “Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated.”
The U.S. gross domestic product’s first-quarter growth rate of 0.7 percent per year was the lowest in four years, the U.S. Commerce Department’s Bureau of Economic Analysis said today. (READ MORE)
But a livelier economy since April is likely to push the annual growth rate above 3.0 percent for the second quarter, according to forecasts by JPMorgan Chase & Co., Morgan Stanley and HSBC Securities USA Inc., Bloomberg News said.
Fed policymakers “do face a problem if inflation stays where it is,” noted Stephen Cecchetti, a professor of international economics at Brandeis University in Waltham, Mass., and a former director of research at the New York Fed, telling Bloomberg: “That is why they have been working so diligently to bring it down.”
Their preferred inflation measure – the “core” personal consumption expenditures index, excluding food and energy – rose at an annual pace of 2.4 percent in the first quarter, the BEA said. In April, however, the core PCE’s rise slowed to 2 percent. (The May consumer price report is due tomorrow.)
“They are still at the outer limit” of their 1- to 2-percent comfort zone, Lou Crandall, chief economist at Wrightson ICAP LLC, in Jersey City, N.J., told Bloomberg before the Fed’s announcement. Firm commodity prices, a robust global expansion and a weak dollar mean “risks are tilted” toward higher prices, he added.
“In these circumstances,” the FOMC wrote, “the committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth.”
Additional information, including the full statement issued today by the Federal Open Market Committee, can be found at www.federalreserve.gov.