Wednesday, December 10, 2003

Fed keeps key interest rate steady

By Jeannine Aversa
The Associated Press
and Jeff McKinney
The Cincinnati Enquirer

WASHINGTON - The Federal Reserve, seeking to keep the economic recovery rolling, held a main short-term interest rate at a 45-year low Tuesday.

At their last regularly scheduled meeting of the year, Fed chairman Alan Greenspan and his Federal Open Market Committee colleagues - the group that sets U.S. interest rate policy - left the federal funds rate unchanged at 1 percent. The fed funds rate, the interest banks charge each other on overnight loans, is the Federal Reserve's primary tool for influencing the economy.

With inflation tame, the committee believes low short-term interest rates "can be maintained for a considerable period," Fed policy-makers said in a unanimous decision.

They said that since the last meeting in October, economic data "confirms that output is expanding briskly and the labor market appears to be improving modestly." The comment on the labor market was more upbeat than at the October meeting when the Fed said that the labor market was stabilizing.

"They are seeing the economy move up another notch in terms of improvement," said Lynn Reaser, chief economist at Banc of America Capital Management.

The Fed's decision to leave the funds rate alone means commercial banks' prime lending rate for many short-term consumer and business loans remains at 4 percent, the lowest level since 1959.

On Wall Street, the Dow Jones industrials broke through the 10,000 barrier briefly Tuesday, reaching a significant milestone in Wall Street's remarkable recovery from the bear market before retreating on profit-taking.

It was the first time since May 31, 2002, that the Dow had been above 10,000 and marked a solid comeback from the five-year low of 7,286.27 on Oct. 9, 2002.

"The Fed elected to keep rates low for a considerable period but hinted at the need to tighten monetary policy sometime next year," said Ellie Moffat, vice president and portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati.

A climate of super-low short-term borrowing costs might give consumers and businesses an incentive to spend and invest more and thus boost economic growth.

Much of that consumer spending - spurred by 12 previous rate cuts by the Fed since 2001 - is prompting consumers to buy big-ticket items like cars and homes nationally and locally.

Low interest rates on car loans and manufacturer rebates are among factors helping Tristate car dealers record their best year since 2000, said Edward "Ace" Ammann, executive director of the Greater Cincinnati Automobile Dealers Association.

Ammann reported new-car sales for members in his group of about 95,000 from January through October, up from 93,600 from the same period last year. He projected that sales for 2003 could hit about 110,000 if they maintain their current pace.

John Augustine, director of investment strategy at Fifth Third Bank, said the Fed's comments made two things clear:

• The Fed has finished lowering interest rates.

• Mortgage rates could rise in coming months, but the increase likely will be gradual.

The average rate on a 30-year, fixed-rate $100,000 mortgage was 5.94 percent this week, down from 6.22 percent a year ago, the Cincinnati Area Board of Realtors reported Tuesday.

The low rates have boosted housing affordability for many. In Southwest Ohio, Northern Kentucky and Southeastern Indiana sales through October stood at 26,460, up about 10.8 percent from the same 10-month period a year ago, according to local Boards of Realtors. The annual record of 27,904 was set last year.

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