Tuesday, December 12, 2006

Fed Holds Interest Rates Steady,

Fed Holds Interest Rates Steady,
While Warning About Inflation

December 12, 2006 3:06 p.m.

The Federal Reserve left interest rates unchanged as it acknowledged that the economy has weakened and the housing pullback has gathered force, but reiterated its concern about inflation.

"Economic growth has slowed … partly reflecting a substantial cooling of the housing market," the Fed said. That was a more emphatic characterization than in previous statements which described the housing market as simply cooling. It added, "Although recent indicators have been mixed, the economy seems likely to expand at a moderate pace on balance over coming quarters."

It repeated its previous assessment that inflation is "elevated" and could rise further given the lack of spare economic capacity, but should moderate. But it repeated, as it did at the previous three meetings, that some inflation risks remain and thus it views its choice on interest rates as whether to raise them, not lower them.

Ten of the 11 voting members of the policy-setting Federal Open Market Committee agreed to leave the target for the federal funds rate, charged on overnight loans between banks, at 5.25%. Federal Reserve Bank of Richmond President Jeffrey Lacker dissented, favoring instead a quarter-percentage-point increase. It was the fourth consecutive meeting at which he dissented.

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