Fed Leaves Rates Unchanged

As expected, Federal Reserve policy-makers left short-term interest rates unchanged Tuesday, apparently comfortable with their last change 15 months ago.

With inflation calm, U.S. growth tapering off and economic troubles still afflicting Asia, Wall Street didn't expect the central bank's rate-setting Federal Open Market Committee to act.

"The Fed knows the market does not like surprises," said Chris Varvares of Macroeconomic Advisers in St. Louis.

The central bank last guided interest rates higher in March 1997, before Asia's economies began to slump. The short-term fed funds rate, which banks charge each other for overnight loans, has been stuck at 5.50 percent.

"The Fed did what they should have done - nothing," said Lyle Gramley, a former Fed governor and now a consultant to the Mortgage Bankers Association. "The Asian turmoil is still ongoing. And there is no immediate threat of inflation."

Indeed, on Tuesday the Labor Department reported that consumer prices for July rose a modest 0.2 percent. For the year, consumer prices are up an annualized 1.5 percent, down from 1.7 percent in 1997. Prices in the producer pipeline, moreover, are also muted.

Domestic prices are being held down in part by a flood of cheap exports from Asia as countries there try to export their way out of their economic slumps. The decline in demand from Asia for American goods has also worked to trim U.S. growth from 5.5 percent in the first quarter to a initial estimate of 1.4 percent in the second three months of the year.

The U.S. trade deficit registered $14.2 billion in June, below the record of $15.5 billion set in May, but still high, the Commerce Department reported earlier Tuesday.

"The drag's still there from trade," Gramley said.

Sentiment on Wall Street is starting to shift away from the once widely held belief that the next central bank move will be a rate increase. The bank had been concerned earlier in the year that the combination of robust growth, a low unemployment rate and tight labor markets would force companies to raise prices.

Not so fast, several Fed watchers say.

"We are clearly going through a slow patch right now," Gramley said. "But one can make the argument that the economy may rebound."

Written By Jeffry Bartash