Fed Leaves Key Interest Rate Unchanged

The Federal Reserve left a key interest rate unchanged on Wednesday as the economy signaled that it was on track for a soft landing in which growth slows enough to restrain inflation.

Fed Chairman Ben Bernanke and his colleagues voted to keep the funds rate, the interest that banks charge each other, at 5.25 percent. It marked the seventh straight meeting at which the Fed has kept rates steady.

The decision had been widely expected by financial markets. Many economists believe the central bank could remain on hold until late 2007 when Fed officials may start cutting rates to combat rising unemployment levels.

The Fed's last rate change occurred nearly a year ago — on June 29, 2006 — when the funds rate was increased for a 17th straight time. That capped a two-year period in which the central bank pushed the funds rate up from a 46-year low of 1 percent in an effort to slow the economy enough to restrain rising inflation pressures without pushing the country into a recession.

The latest decision, which was announced after the Fed's regular closed-door discussions, meant that the prime rate, the benchmark for millions of consumer and business loans, will remain unchanged at 8.25 percent.

So far, the Fed's plan seems to be working to slow economic growth and lower inflation pressures. But the steep slide in the once-booming housing sector has raised concerns among some economists that the slowdown could worsen into a more severe downturn.

The Fed made only small changes in its brief statement commenting on current economic conditions.

It stated that "economic growth slowed in the first part of this year" rather than saying that economic conditions were mixed, the way it had described the economy at its March meeting.

Economic growth, as measured by the gross domestic product, slowed in the January-March quarter to an annual rate of 1.3 percent, the weakest performance in four years, while the jobless rate inched up to 4.5 percent in April as businesses created just 88,000 new jobs.

The economic slowdown is having the desired effect of reducing inflation. The Fed's preferred gauge of price pressures increased by just 2.1 percent for the 12 months ending in March, down from what had been a troubling 2.4 percent increase for the 12 months ending in February.

Because the scenario for a soft landing appears to be unfolding, analysts said the Fed could well remain on hold for a number of months. That would disappoint those investors who had been hoping that the Fed would respond to the troubles in the housing industry by starting to cut interest rates.

Bernanke and other Fed officials in recent weeks played down expectations for possible rate hikes by stressing that their main worry was not that the economy might slow more than desired but that inflation might not come down as much as needed to keep it under control.

In the statement Wednesday, the Fed said that core inflation "remains somewhat elevated" and it continued to say that the Fed's main concern remained "the risk that inflation will fail to moderate as expected."