Fed holds rates steady, even as economy picks up

WASHINGTON - The Federal Reserve voted unanimously yesterday to make no change in interest rates, because inflation remains modest even with the economy picking up steam.

The step was good news for businesses and individuals who borrow money, and stock prices surged on the Fed's announcement.

Fed Chairman Ben S. Bernanke and his central bank colleagues left their key fed funds interest rate unchanged at 5.25 percent, the fifth straight meeting without budging the rate.

That means commercial banks' prime interest rate - for certain credit cards, home-equity lines of credit, and other loans - stays at 8.25 percent, once again giving a break to borrowers who until last summer had endured the pain of two-plus years of rate increases.

In yesterday's announcement, Fed policymakers delivered a more positive assessment of the economy than at the last meeting, in December, recognizing improvements in economic growth, inflation, and even the troubled housing sector.

"Overall, the economy seems likely to expand at a moderate pace over coming quarters," they said.

At the same time, the Fed said, core inflation, which excludes energy and food prices, has "improved modestly in recent months." That was an upgrade from December, when policymakers fretted about "elevated" readings on underlying inflation.

They continued to note that inflation risks remained, keeping open the possibility of a rate increase. Still, with the Fed's fairly upbeat assessment, many economists say they believe rates are likely to remain where they are for much of this year.

"It's nice that they have changed their footing a little bit," said Paul R.T. Johnson, chief executive officer of Boston Cabot, of Chicago. "Maybe we can have good economic growth with low inflation."

The Fed's statement dropped language that described inflation as elevated, which triggered a rally in stocks and bonds as investors concluded the central bank would keep rates unchanged for at least six months.

The new wording overshadowed the Fed's inclination to keep interest rates high to ward off inflation. High rates discourage borrowing, thus slowing economic growth. In turn, that keeps prices in check.

Yesterday's Fed announcement came hours after the government reported that the economy snapped out of a sluggish spell and grew at a 3.5 percent pace in the final quarter of last year as consumers ratcheted up spending.

To fend off inflation, the Fed boosted interest rates 17 times from June 2004 through June 2006, the longest rate-boosting stretch in its history.

But since last summer, it has left rates alone. Economists say they believe the Fed is on course to achieve its goal of slowing the economy sufficiently to thwart inflation, but not so much as to seriously hurt economic activity.

"The Fed almost seemed to be on the verge of declaring victory," said Joel Naroff, president of Naroff Economic Advisors, of Holland, Pa.

From yesterday's statement on interest rates and the national ecomomy:

"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."

"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."

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