THE FED
Fed holds rates steady, sees inflation elevated
By Rex Nutting, MarketWatch
Last Update: 2:16 PM ET Mar 21, 2007
WASHINGTON (MarketWatch) - The Federal Reserve held its benchmark interest rate steady Wednesday, saying its
"predominant policy concern remains the risk that inflation will fail to moderate as expected."In its statement, the Federal Open Market Committee acknowledged recent data showing both higher inflation and a weaker economy.
In its statement released at the conclusion of their two-day meeting, the FOMC no longer said that indicators have suggested "somewhat firmer economic growth" as they did in comments issued at the conclusion of their January meeting. Instead, the Fed said recent indicators had been "mixed."
And instead of saying they saw "some tentative signs of stabilization" in the housing markets, the committee said "the adjustment in the housing sector is ongoing."The FOMC repeated that rising inflation remains the greatest risk to a stable economy. "Recent readings on core inflation have been somewhat elevated," the statement said. "The high level of resource utilization has the potential to sustain those pressures."
The Fed has held its key short-term rate at 5.25% since last June. Since its last meeting in late January, more signs of a slowing economy have emerged, including further troubles in the mortgage market and a sharp downward revision to fourth-quarter growth. But inflation worries have also mounted, putting the Fed in a delicate position. Read our complete Fed coverage.
With forces pushing them in opposite ways -- to raise rates to quell inflation and to lower rates to revive growth -- the Fed opted to do nothing while events play out. The Fed's baseline forecast is for both inflation and growth to stabilize.
Financial markets have priced in one or two rate cuts this year, but a sizable number of economists and strategists say the Fed is more likely to raise rates to stop inflation from getting too high.
The Fed's official policy stance leans toward raising rates, but that could change in an instant if growth slowed too quickly or signs of systemic market turmoil emerged.
The vote to keep rates steady was unanimous.
The Fed targets overnight lending rates to loosely control inflation via their impact on economic activity. Higher rates cool the economy, reducing inflationary pressures over time as demand slows. Lower rates can boost demand.
Banks typically peg their prime lending rates to the federal funds rate. Credit-card rates and adjustable-trade mortgages are sometimes also tied directly to the Fed target.
Rex Nutting is Washington bureau chief of MarketWatch.
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