Fed takes step back on interest rate push

The Federal Reserve on Wednesday suggested it has softened its disposition toward raising interest rates, boosting hopes for rate cuts later this year that could spur growth and ease housing woes.

While leaving its benchmark short-term rate unchanged at 5.25 percent, as expected, the Fed referred to "future policy adjustments" without specifying possible rate increases as it has in the past. That indicated it adopted a more neutral stance — no longer as biased toward raising rates, analysts said.

Investors hoping for rate cuts were cheered. The Dow Jones industrial average, flat before the announcement, rallied sharply after the news, posting a gain of nearly 160 points — its biggest of the year.

The Fed also acknowledged that the economy is slowing, saying recent economic indicators "have been mixed and the adjustment in the housing sector is ongoing." But it also said it's more worried about inflation than slowing growth, saying its "predominant policy concern remains the risk that inflation will fail to moderate as expected." That suggested more rate hikes might be in store.

The Fed's inclusion of statements that were dovish and hawkish toward inflation suggest the central bank wants to be more flexible, facing an economy that is slowing and showing signs of rising inflation, analysts said. Gasoline prices have risen sharply recently while consumer and wholesale inflation came in higher than expected last month.

They are opening the door to rate cuts "if the numbers continue to be weak on the growth front," said Andrew Tilton, senior U.S. economist at Goldman Sachs in New York, who predicts the Fed will cut rates at its June meeting after inflation has cooled.

The Fed now has left interest rates unchanged at its last six meetings, after raising rates 17 times since 2004. Consumer inflation is now rising at an annual rate of 2.4 percent, above the Fed's comfort zone of between 1 percent and 2 percent.

Given the Fed's inflation-fighting tendencies, Fed Chairman Ben Bernanke will have to resist the urge to raise interest rates as growth slows, analysts say.

Wednesday's Wall Street rally fed the growing perception that the latest market decline has run its course.

source:www.chron.com