WASHINGTON – With the economy advancing only in fits and starts, the Federal Reserve held short-term interest rates steady on Tuesday but left the door open to future reductions.
The Fed’s decision comes amid a roller-coaster stock market and a stream of accounting scandals that have rocked Americans’ confidence in corporate leaders and in their own financial futures.
“The economy has gone flat, and they recognize that,” said Mark Zandi, chief economist at Economy.com.
By keeping rates at four-decade lows – or, perhaps, nudging them down later – federal policy-makers could expect consumers to spend more and businesses to step up investment. That would quicken the recovery, which has lost momentum since the beginning of the year.
A softening in consumer and business demand that emerged this spring “has been prolonged in large measure by weakness in financial markets and heightened uncertainty related to problems in corporate reporting and governance,” the Fed said in a statement.
For now, Chairman Alan Greenspan and his Federal Open Market Committee colleagues opted to hold the federal funds rate – the interest that banks charge each other on overnight loans – at 1.75 percent, the lowest level since July 1961. It marked the fifth consecutive Fed meeting this year in which policy-makers opted to leave rates alone.
However, the Fed changed the wording of its announcement Tuesday, saying that the greatest risk ahead is a further slowing of the economy, raising the odds of later rate cuts.
On Wall Street, stock prices were marginally higher for much of the day but sank in the afternoon after the Fed’s announcement.
Since its March meeting, the central bank had indicated that economic risks were equally balanced between inflation and weak growth, a neutral policy stance.
But the Fed also struck an optimistic note, suggesting that currently low rates and productivity gains “should be sufficient to foster an improving business climate over time.”
The Federal Reserve will meet again Sept. 24.
Some economists believed the Fed would cut rates only if it looked as though there might be a big shock to the economy, such as a massive credit crunch that threatened to paralyze the nation’s financial system, or clear signs that the economy was slipping back into recession.
“I think it would take a major problem to cause the Fed to cut rates,” said Lynn Reaser, chief economist at Banc of America Capital Management. “But the Fed sent a signal that it is prepared to give the economy support if required, even though it also suggested it was relatively optimistic about the likelihood that the economy will move back on a better growth track, rather than slide into recession.”
Absent a crisis, Reaser and other analysts believe the Fed will probably hold interest rates steady for the rest of the year. That’s based on the belief that rates are currently low enough to guarantee an economic recovery and that further rate cuts might not generate much more economic activity.