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Wall Street Not Surprised at Fed Action Holding Interest Rate Steady - 2004-03-16


Federal Reserve policy makers meeting in Washington Tuesday voted to leave the benchmark U.S. interest rate at a 45-year low of one percent.

Holding the key lending rate steady took no one by surprise, but Wall Street analysts were heartened to see the Federal Reserve did not change its post-meeting wording from January, when it said it would be patient in holding down borrowing costs to help foster U.S. job growth. But as former Fed governor Lyle Gramley says, the U.S. central bank's statement Tuesday indicates a higher level of concern about U.S. employment.

"The statement about labor market conditions is a little less optimistic, than the one they used in January," he said. "In January they said other indicators were pointing to some improvement in the labor market - they have dropped that formulation now, and seem to suggest they're a little bit more cautious about the prospects for a turnaround in job creation in the near term."

Many economists believe the Federal Reserve will not tighten the monetary supply until after the next presidential election in November, and many experts believe a rate change will not happen before 2005. But low interest rates are generally a good thing - according to economist David Wyss with Standard and Poor's.

"It's hard to find negative effects of this, except that in the long run, they're going to have to raise rates, so it could be painful when they actually have to do it," he said. "But at this point, rates are low, they're going to stay low, and if you have not refinanced your mortgage yet you have some time to do it."

Economist David Wyss says that a low lending rate from the U.S. central bank is also good news for the global economy.

"Obviously, a lot of economies are tied to the dollar," he said. "And low interest rates here are good because they mean lower interest rates abroad as well. So this is generally good news for world economic growth. It would be even better news if we could get the European Central Bank to follow and lower their rates - I don't expect to see that anytime soon."

In their economic statement Tuesday, Federal Reserve officials also said that they believe that the risk in the United States of disinflation, or slowing inflation, remains "almost equal' to the danger of accelerating price increases. The U.S. central bankers said that they see the upside and downside risks for economic growth to be about equal over the next few quarters.