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Fed Extends License To Spend

The Federal Reserve left a key interest rate unchanged Wednesday, giving Americans more time to enjoy some of the lowest borrowing costs in four decades.

That might give consumers an incentive to spend and businesses motivation to step up investment in new plants and equipment. Both are crucial ingredients in helping along the economic recovery.

At the end of a two-day meeting, Federal Reserve Chairman Alan Greenspan and his Federal Open Market Committee colleagues decided to hold the federal funds rate — the interest that banks charge each other on overnight loans — at 1.75 percent, a 40-year low. It was the fourth consecutive time this year that policy-makers opted against changing rates.

The decision by the Fed means commercial banks' prime lending rate — a benchmark for many consumer and business loans — will remain at 4.75 percent, a level last seen in November 1965.

The Fed, in a statement, said economic growth is continuing to increase but strength in consumer and business demand appears to have moderated.

Still, Fed policy-makers said they expect such demand ``to pick up over coming quarters.''

Recent economic reports suggest the recovery is slowing. Some economists believe economic growth, as measured by the gross domestic product, will clock in at around 2.5 percent in the current quarter, down from the brisk 5.6 percent pace posted in the first three months of the year.

Financial markets were in fresh turmoil on Wednesday on news that WorldCom would restate its results for 2001 and the first quarter of 2002 to show losses.

Analysts said this could turn out to be one of the biggest cases of accounting fraud in U.S. history -- a further blow to investor faith in the integrity of the world's most liquid markets and push rate rises even further into the future.

Early in the year, analysts thought the Fed would start raising rates by this time to head off potential inflation but the timing of such a reversal in rate strategy has steadily retreated.

The economy, while clearly in recovery from last year's brief recession, has never really caught fire and ignited a burst of activity strong enough to require the Fed to dampen it with interest rate increases.

White House economic adviser Glenn Hubbard, speaking to an industry group on Tuesday, said there will be ``reasonable growth'' in the second half this year but the expansion would not be exceptionally robust. He foresaw second-half expansion at annual rate of 3 percent or slightly more.

Consumers, whose spending accounts for two-thirds of all economic activity, have shown less vigor recently. Sales at the nation's retailers were down 0.9 percent in May, the largest drop in six months, though unusually cool weather was a factor chilling shoppers' appetites.

Still, low mortgage rates and solid appreciation in housing values, especially given the weak performance of the stock market, continue to motivate home buyers.

New-home sales shot up 8.1 percent in May to a record monthly level of 1.03 million, the Commerce Department reported Wednesday.

"I think residential real estate will continue to be a safe haven," said Van Davis, president of Century 21 Real Estate Corp.

Although the unemployment rate dipped to 5.8 percent in May, the jobs market remains sluggish, and economists worry that could dampen consumer spending in coming months.

Manufacturing, after being knocked down by the recession, is back on its feet but isn't bursting with vitality. In another report Wednesday orders to U.S. factories for big-ticket items rose 0.6 percent in May.

Capital spending by businesses has yet to turn around, which means a key component to a sustained recovery is lacking, economists said. Deep cuts in spending on new plants and equipment helped push the economy into recession.

Companies that saw their profits take a hit during the slump are worried about the recovery's staying power and are reluctant to make big commitments, in spending or hiring, until they are convinced the turnaround is for real, analysts said.

Some economists worry that violence in the Middle East, tension between India and Pakistan, threats of new terror attacks on the United States and Enron-type accounting scandals will give companies another reason not to make big commitments.

With inflation well-behaved, policy-makers have leeway to keep rates low through the summer to help along the economic recovery, economists said.

Fed policy-makers, who slashed interest rates 11 times last year to rescue the economy from recession, have not changed the funds rate since last December.

Some economists are now predicting that the first interest-rate increase would come at the Fed's Sept. 24 meeting at the earliest. Some forecast the first rate increase would come later, in November or December. Others believe there's a good chance rates may be left alone for the rest of the year.

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