Fed stands pat on rates, hints of hike in June

By Barbara Hagenbaugh
USA Today

WASHINGTON — Saying the economy is growing at a "significant pace," the Federal Reserve left interest rates unchanged yesterday but signaled rate increases may be coming soon.

Many analysts expect the first rate increase in late June. Fed officials unanimously voted to leave the target for short-term interest rates — which affect borrowing costs for everything from cars to credit cards — at 1.75 percent, a 40-year-low. The Fed cut interest rates 11 times last year to boost the recession-hit economy.

But with signs building that the economy is on the mend, the Fed signaled it may raise rates soon to take away some of the stimulus.

In its closely watched, post-meeting statement, the Fed dropped wording that the biggest risk was economic weakness, a phrase that has been in place since December 2000. Instead, the Fed said risks were "balanced" between inflation and weakness.

While the change appears minor, it's a big shift in Fed lingo.

"They're basically setting (the public) up for tightening this year," says Anthony Chan, chief economist at Banc One Investment Advisors in Columbus, Ohio.

The Fed expressed cautious optimism about the economy but warned the outlook for business and consumer demand was "still uncertain."

With the outlook still cloudy, most economists expect no change in rates at the Fed's next meeting on May 7, to give policymakers time to make sure the recovery is on course.

Analysts say the Fed this year won't come close to reversing the 4.75 percentage points of rate cuts it enacted in 2001. By year's end, most economists see short-term rates around 3 percent.