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     DJ Fed Leaves Rates At 5.25%; Still Sees Inflation Risk(DJ)

  By Brian Blackstone and Campion Walsh
  Of DOW JONES NEWSWIRES
  WASHINGTON (Dow Jones)--The Federal Reserve on Wednesday held
interest rates steady a second-straight time, reckoning that
slower economic growth will ease inflation rates which, for now,
remain well above the central bank's comfort zone.
  In a nod to those price pressures, officials continued to lean
toward tighter monetary policy should inflation persist.
  The Federal Open Market Committee voted 10-1 to keep the Fed funds
rate at 5.25%. The FOMC's decision was expected by all 20 primary
dealer economists surveyed by Dow Jones Newswires Monday.
  Richmond Fed President Jeffrey Lacker dissented a second-straight
meeting, preferring a 25-basis-point rise.
  "The moderation in economic growth appears to be continuing,"
reflecting a "cooling" housing market, the Fed said. Meanwhile,
inflation seems "likely to moderate over time," the Fed said,
citing falling energy prices, contained inflation expectations and
past rate hikes.
  However, "some inflation risks remain," the FOMC said, and
officials signaled that they remain on watch for any signs of
inflation, which has remained "elevated" due to such factors as
high resource utilization.
  "The extent and timing of any additional firming that may be
needed...will depend on the evolution of the outlook for both
inflation and economic growth, as implied by incoming
information," the FOMC said, repeating its tightening bias from
August.
  Last month's rate pause broke a string of 17-straight 25 basis
point increases in the Fed funds rate dating back to June 2004,
when rates were a five-decade low of 1%.
  Economic figures released since the Aug. 8 FOMC meeting have been
broadly in line with the Fed's forecast that a slowing economy
will ease price pressures over time.
  Payrolls expanded just 128,000 in August, after expanding a
similarly tepid 121,000 in July. And housing numbers have fallen
off considerably. Housing starts are at a three-year low, and a
recent homebuilders' survey for new homes fell to its lowest level
since 1991.
  Meanwhile, core consumer prices, which exclude food and energy,
posted back-to-back 0.2% monthly gains in July and August, after
four-straight worrisome 0.3% increases. Core producer prices,
meanwhile, fell two straight months - a good leading indicator of
future consumer price trends.
  Sliding oil prices since August have further brightened the price
outlook and pushed even more economists into the camp of those
expecting no more rate increases in 2006.
  The Fed cited a "reduced impetus" from energy prices as a factor
behind a likely moderation in inflation.
  Yet inflation remains a risk. Despite good monthly data, on an
annual basis the core CPI is 2.8%. And the core personal
consumption expenditures price index, the Fed's preferred gauge,
is running at a 2.4% annual rate, which is well above the Fed's
understood comfort zone of 1% to 2%.
  While lower energy prices will most likely bring overall inflation
rates down, they could also spur consumer and business spending and
keep rates of economic growth high enough to put more pressure on
already strained resources.
  And labor costs, which comprise the lion's share of business
costs, have soared in recent months. Government data released
since the Aug. 8 FOMC meeting revealed that labor costs rose at
their fastest annual rate in 15 years during the second quarter.
 
  -By Brian Blackstone and Campion Walsh; Dow Jones Newswires;
202-828-3397; brian.blackstone@dowjones.com and
campion.walsh@dowjones.com
  (Benton Ives-Halperin contributed to this article)
  (END) Dow Jones Newswires
  September 20, 2006 14:13 ET (18:13 GMT)
  Copyright (c) 2006 Dow Jones & Company, Inc. - - 02 13 PM EDT
09-20-06

Keywords:  CURRENCY ENERGY FINANCIAL ECONOMY GENERAL
13:13:49   09/20/06