www.sfgate.com/cgi-bin/article.cgi?file=/news/archive/2004/05/04/financial1419EDT0159.DTL&type=printable
DTL (05-04) 12:02 PDT WASHINGTON (AP) -- The Federal Reserve held a main short-term interest rate at a 46-year low Tuesday, but it signaled that borrowing costs could move higher in the months ahead now that the economy is humming along. Fed Chairman Alan Greenspan and his Federal Open Market Committee colleagues -- the group that sets interest rate policy in the United States -- left the federal funds rate unchanged at 1 percent, where it has been since last June. The funds rate is the Fed's primary tool for influencing the economy. But Fed policy-makers dropped a pledge they had made at their previous meetings this year, in January and March, to be patient in ordering any possible rate increases. On Wall Street, the Dow Jones industrial average, which had been down most of the day, turned positive within minutes of the announcement, but then dipped again. The Fed's decision Tuesday to leave the fund rate alone means commercial banks' prime lending rate for many short-term consumer and business loans remains at 4 percent, the lowest level in more than four decades. Extra-low borrowing costs have helped to support economic growth by motivating consumers and businesses to spend. Importantly, a government report issued after the Fed's March meeting showed that the economy, after months of sluggish payroll gains, added 308,000 jobs in March, the most in four years. While that raised hope that the jobs market may be turning an important corner, economists say steady and solid gains need to be made in coming months for confirmation that the corner has been turned. Other data since the Fed's last meeting show that inflation is creeping higher. Although inflation is not a threat to the recovery at this point because it remains low, the upward movement marks a change in the pricing climate from a year ago. Then the Fed was worried about the prospects of deflation, a prolonged and widespread price decline, economists say. Greenspan told Congress recently that interest rates must rise to keep inflation in check, but he didn't say when that might happen. A growing number of economists predict the Fed will begin to nudge up rates at its Aug. Others don't believe a rate increase will come until the Fed's Nov. Under any scenario, analysts believe Fed officials will take their time once they start pushing rates up and don't expect a replay of 1994, when the Fed embarked on a yearlong series of rate increases that led to a doubling of the funds rate. The recovery is heading in the right direction and appears to have staying power, analysts said. That would be good news for President Bush, who is counting on healthy economic activity this summer as he campaigns for re-election. The state of the economy figures prominently in the presidential campaign, where Bush and presumptive Democratic nominee John Kerry have been facing off over that issue, among many others. Kerry points to those losses as evidence that the president's economic policies are flawed. Bush insists his policies are working, and a stronger economy will spur job growth.
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