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

05/09/07 13:15

(MORE TO FOLLOW) Dow Jones Newswires

May 09, 2007 14:15 ET (18:15 GMT)

Copyright (c) 2007 Dow Jones & Company, Inc.

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

05/09/07 13:15

By Brian Blackstone and Benton Ives-Halperin

Of DOW JONES NEWSWIRES

WASHINGTON (Dow Jones)--With economic growth and inflation conforming largely to its forecast, the Federal Reserve on Wednesday left interest rates steady and signaled it has no inclination to change them anytime soon.

The Federal Open Market Committee voted unanimously to keep the federal funds rate at 5.25%, where it has stood since June 2006 - a period encompassing seven FOMC meetings.

Wednesday's outcome was universally expected in a Dow Jones Newswires survey of economists.

An accompanying statement acknowledged some recent weakening in the economy, but otherwise mirrored the previous one issued on March 21 in which officials called for "moderate" economic growth and a gradual cooling of price pressures.

Officials repeated that inflation remains the "predominant policy concern" and that "future policy adjustments" will depend on incoming data.

Before the March FOMC meeting, officials had referred to "any additional firming" that may be needed. That change seven weeks ago to a more neutral directive caught investors off guard, with markets initially assuming that deletion of the explicit reference to higher rates opened the door to rate cuts.

However, subsequent remarks by officials made it clear the Fed sees inflation as the primary risk and thus has an implicit leaning toward higher, not lower rates. Financial markets still expect the next move to be a rate cut late this year, but now only one quarter-point reduction to 5% is fully priced in, whereas right after the March FOMC meeting as many as three cuts were priced in.

Analysts didn't think the Fed wanted a repeat of the confusion that ensued after the March policy statement, and thus looked for few if any changes at this meeting.

In Wednesday's statement officials said the economy "slowed" in the first part of the year. Previously, it described the economy as "mixed."

The Fed repeated that the housing adjustment is "ongoing," but that the likeliest scenario remains "moderate" economic growth in the months ahead.

They also said core inflation remains "somewhat elevated" but should come down.

Payrolls advanced a meager 88,000 last month and gross domestic product grew just 1.3% in the first quarter - less than half the economy's widely-assumed growth potential of around 3% - as housing remained a major drag.

Yet purchasing managers surveys for both manufacturing and services surprised to the high side last month, and jobless claims fell sharply in late April, suggesting that hiring may turn around in May. And the unemployment rate, at just 4.5%, remains very low by historical measures, which should support consumer spending.

In a nod to the low jobless rate, officials repeated that high resource utilization remains an inflation threat.

Still, the latest core inflation rates, which exclude food and energy, have softened considerably. The core personal consumption expenditures price index, the Fed's preferred gauge, slipped to 2.1% in March from 2.4% in February, putting it near the top end of the Fed's assumed comfort zone of inflation at 2% or below. Labor costs also seem well under control.

Still, the fact that officials stuck to their description of core inflation as elevated isn't surprising given the volatility of recent numbers and the risk that higher food and energy prices might seep into underlying prices.

-By Brian Blackstone and Benton Ives-Halperin; Dow Jones Newswires; 202-828-3397; brian.blackstone@dowjones.com and benton.ives-halperin@dowjones.com

(Jeff Bater and Henry J. Pulizzi contributed to this article)

(END) Dow Jones Newswires

May 09, 2007 14:15 ET (18:15 GMT)

Copyright (c) 2007 Dow Jones & Company, Inc.

Keywords: ENERGY, FINANCIAL ECONOMY, CURRENCY, GENERAL, FINANCIAL CURRENCY

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