CBSN

No Change In Interest Rates

Federal Reserve Bank and seal
CBS/AP
The Federal Reserve, seeking to keep the economic recovery rolling along, held a main short-term interest rate at a 45-year low Tuesday.

At their last regularly scheduled meeting of the year, Fed Chairman Alan Greenspan and his Federal Open Market Committee colleagues — the group that sets interest rate policy in the United States — left the federal funds rate unchanged at 1 percent.

The funds rate, the interest banks charge each other on overnight loans, is the Fed's primary tool for influencing the economy.

With inflation low, the committee believes that short-term interest rates "can be maintained for a considerable period," the Fed said.

It said that since the last meeting in October, economic data "confirms that output is expanding briskly and the labor market appears to be improving modestly." The comment on the labor market was more upbeat than at the October meeting when the Fed said that the labor market was stabilizing.

The Fed's decision to leave the funds rate alone means commercial banks' prime lending rate for many short-term consumer and business loans remains at 4 percent, the lowest level since 1959.

A climate of super-low short-term borrowing costs may give consumers and businesses an incentive to spend and invest more and thus boost economic growth.

In another change from the Fed's statement in October, policy-makers expressed less concern about inflation moving lower. That had previously been identified as a big risk to the economy.

"The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation," Fed policy-makers said Tuesday.

After a bumpy economic journey following the 2001 recession, there have been some encouraging signs that the road is getting a bit smoother.

The economy snapped out of a funk in the spring and then rocketed at a 8.2 percent annual growth rate — the strongest performance in nearly two decades — during the summer.

Economic growth in the current October-to-December quarter is expected to slow but still clock in at a solid rate of about 4 percent, as some of the stimulus that helped in the third quarter — President Bush's third round of tax cuts and a wave of mortgage refinancing — fades.

Although the job market and business investment have improved, more progress must be made for the recovery to last, economists said.

The nation's unemployment rate dropped to an eight-month low of 5.9 percent in November. But the economy's four-month hiring spurt slowed. Payrolls grew by 57,000 last month, a figure that disappointed analysts, who were expecting jobs gains in the 150,000 range.

While the Fed's low interest rates have spurred consumer and business borrowing in this country, the low rates have put downward pressure on the value of the U.S. dollar compared with other currencies. In recent days, the dollar has fallen to record lows against the European Euro. The concern is that foreign investors will move money out of the United States in search of higher interest rate returns in other countries.

The Bush administration, meanwhile, has been pushing China to relax controls on its currency, which U.S. manufacturers contend make Chinese exports unfairly cheap on world markets.

The Fed last cut the funds rate on June 25 by one-quarter percentage point. Since then, it has opted to leave the funds rate unchanged.