US fed keeps current interest rate

Feb.2007

The US Federal Reserve has once again voted to keep interest rates at 5.25 %. The target rate for federal funds is set at this rate. This will have the effect of keeping interest rates on consumer credit, credit cards, bank loans etc at rather high rates compared to the actual current rate of inflation and risks tipping the economy into rather slower growth in the months ahead. The one positive offset is the continuance of the very modest 2.25 % to GDP American deficit which continues to be stimulative in comparison with the fairly tight monetary policy. It is a calculated gamble which the Fed under the leadership of Ben Bernanke is taking that fiscal stimulation and optimistic sentiments will be enough despite tight money. Recall that real rates for consumers and small businesses are of the order of 4 % and much higher depending on the nature of the debt and its means of financing. Outsourcing of jobs and plant closures in manufacturing continues to be a problem and certain medium term business cycle effects are in play as well.        

A small cut in the rates would have been a better bet but time will tell if Bernanke is correct in his assessment.The problem for the Fed will be that in the coming months the next American Presidential election will loom larger and the Fed ought to be reluctant to be seen as interfering with the election by creating a recession that will benefit the Democrats or a boom that may help the Republicans. Oil price instability continues to be a potential spanner in the works.

Bloomberg's reproduction of the open market committee's statement appears below.

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U.S. Federal Open Market Committee Statement: Text

By Washington newsroom +1-202-624-1820

Jan. 31 (Bloomberg) -- The following is the full text of the statement released today by the Federal Reserve:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5 1/4 percent.

Recent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market. Overall, the economy seems likely to expand at a moderate pace over coming quarters.

Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time. However, the high level of resource utilization has the potential to sustain inflation pressures.

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; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan; Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh.

Last Updated: January 31, 2007 14:14 EST