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DJ 2nd UPDATE:Fed Leaves Rate At 5.25%;Sees Inflation Risk 10/25/2006 Dow Jones News Services (Copyright © 2006 Dow Jones & Company, Inc.) WASHINGTON (Dow Jones)--The U.S. Federal Reserve on Wednesday left the federal funds rate unchanged at 5.25% for a third-straight meeting amid signs of slower growth but kept the door open for higher rates if inflation persists. An accompanying statement largely mirrored the one issued in September, repeating that the economy has slowed due to a "cooling" housing sector, that "some inflation risks remain" and that any additional rate hikes will depend on the economic outlook as implied by data. The statement, which included a new phrase expressing optimism about prospects for moderate economic growth, suggests the likeliest scenario is a prolonged period of policy stability, assuming the Fed's economic forecast unfolds. The Federal Open Market Committee, as universally expected in a Dow Jones Newswires survey, voted 10-1 to keep the federal funds rate at 5.25%, where it has stood since late June following 17 consecutive hikes dating back to mid-2004. Richmond Fed President Jeffrey Lacker dissented for a third-straight time, again preferring another quarter-point hike in the fed funds rate. "Economic growth has slowed over the course of the year," the FOMC said. "Going forward, the economy seems likely to expand at a moderate pace," it added. "With those few words, the Fed has effectively thrown cold water on the notion that the next move will be lower rates," said Bernard Baumohl, head of the Economic Outlook Group, in a research note. "This is an expression of confidence in the economy," said David Kelly, senior economic adviser at Boston-based Putnam Investments. "What (Fed officials) are saying is: 'We feel better about growth, we feel better about inflation'." Fed watchers had expected few changes in the Fed's assessment of policy, since not much has changed on the economic and inflation front over the past six weeks to alter the Fed's view that lower energy prices and a moderating economy should ease price pressures that, for now, remain uncomfortably high. "Some inflation risks remain," the FOMC said, repeating its previous assessment. The Fed again said that underlying inflation readings "have been elevated" and that the "high level of resource utilization" could sustain inflation. The Fed dropped its reference to energy and commodity prices as having the potential to keep inflation high. "The removal suggests that the Fed has become more comfortable that its expectation for a moderation of inflation pressures will be realized," said Tony Crescenzi, strategist at Miller Tabak, in a research note. Officials also repeated that inflation should "moderate" due to "reduced impetus from energy prices," contained inflation expectations and past rate hikes. Monthly inflation numbers have cooled from elevated spring and early summer gains, with the consumer price index excluding food and energy posting three consecutive 0.2% gains through September. The overall CPI, meanwhile, fell last month due to sharply lower energy prices, which should take pressure off energy-related core items like transportation in coming months. Yet the annual core CPI rose to a decade high of 2.9% in September. And the Fed's preferred measure of inflation - the core personal consumption expenditures price index - is running at a 2.5% rate, well above the Fed's 1% to 2% understood comfort zone. Against that backdrop, and with officials such as Fed Vice Chairman Donald Kohn warning that higher inflation poses a greater risk than weak economic growth, it would have been tough to drop the tightening bias and maintain their credibility. The economy, meanwhile, appeared to have slowed sharply in the third quarter due in part to a steep slide in housing, conforming to Fed Chairman Ben Bernanke's projection that a "substantial" housing correction could slice one percentage point off second-half growth. Gross domestic product figures due Friday are expected to show only around 2% growth in the third quarter, down from 2.6% in the second and well below the economy's growth potential of around 3% or higher. But resilient consumer spending outside of housing and automobiles, aided by falling gasoline prices, rising equity values and a tight labor market, should bolster the economy in the fourth quarter, so any slack generated by sub-trend growth could be brief. DJ Text Of Federal Reserve's Interest Rate Decision 10/25/2006 Dow Jones News Services (Copyright © 2006 Dow Jones & Company, Inc.) NEW YORK (Dow Jones)--The following is the verbatim text of the Federal Reserve's decision on interest rates released Wednesday, Oct. 25: The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent. Economic growth has slowed over the course of the year, partly reflecting a cooling of the housing market. Going forward, the economy seems likely to expand at a moderate pace. Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand. Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; William Poole; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting. |
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