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The Honolulu Advertiser
Posted on: Friday, June 29, 2007

Fed keeps interest rate target at 5.25%

By Barbara Hagenbaugh
USA Today

WASHINGTON — Federal Reserve policymakers welcome recent declines in inflationary pressures, but they aren't declaring victory, dashing any remaining hopes for an interest rate cut in 2007.

Fed officials in a unanimous move left their target for short-term interest rates at 5.25 percent, the highest in 6 1/2 years, following the conclusion of their two-day meeting yesterday. The Fed has not changed rates since June 2006 after raising them 17 times over two years.

In their post-meeting statement, Fed Chairman Ben Bernanke and his colleagues said the economy was expected to continue to grow at a "moderate pace" during the rest of the year, suggesting growth is not so strong as to warrant a rate increase to slow the economy.

But while inflation data have "improved modestly" recently, "a sustained moderation ... has yet to be convincingly demonstrated," the Fed officials said. They warned there was a risk inflation pressures could build, disappointing those who had been hoping the Fed would cut rates soon to boost the economy.

"Some market participants may have been holding out for a signal that (the Fed) will cut rates, and they didn't get that," Raymond James & Associates chief economist Scott Brown says.

He expects the Fed will leave rates unchanged for the rest of 2007, but, "the next move is as likely to be higher as it is to be lower."

Financial markets erased modest gains seen prior to the announcement. The Dow Jones industrial average closed the day down 5.45 points at 13,422.28.

Inflation has moderated in recent months but still remains on the high side of what some Fed officials, including Bernanke, have deemed their comfort zone of 1 percent to 2 percent. The Fed's preferred inflation measure, based on spending excluding food and energy, was 2 percent in April, down from 2.4 percent in February.

The Fed's decision to leave short-term rates unchanged means a wide range of borrowing costs and interest rates will likely stay the same.

Consumers with home equity lines of credit, car loans, variable-rate credit cards and other consumer loans tied to the prime rate will likely see little, if any, change in rates. Mortgage rates, which have risen in recent months, will likely not move higher as worries about rate increases diminish, Quicken Loans chief economist Bob Walters says.