Fed Leaves Rates Unchanged, Hints at Future Hikes

The Federal Reserve on Tuesday opted to leave borrowing costs steady but began preparing Americans for the possibility that rates will go higher this year as the country bounces back from recession.

After 11 consecutive rate reductions last year, Fed Chairman Alan Greenspan and his colleagues opted to continue to hold the federal funds rate -- the interest that banks charge each other on overnight loans -- at 1.75 percent, the lowest level in 40 years. The decision was announced after a closed-door meeting.

In a statement issued after the one-day meeting, the Federal Open Market Committee said the economy, bolstered by inventory building, was expanding at a brisk pace. Policymakers also shifted their wording on the threats facing the economy to say risks are now evenly balanced between economic weakness and price pressures.

"The economy, bolstered by a marked swing in inventory investment, is expanding at a significant pace," the Fed said in a statement explaining its decision.

"Nonetheless, the degree of the strengthening in final demand over coming quarters, an essential element in sustained economic expansion, is still uncertain," the Fed added.

Analysts said this subtle change in rhetoric marks the Fed's first step toward likely rate increases later in the year. Many of the firms that work closely with the central bank expect it to raise interest rates as early as June.

The Fed last met on Jan. 29-30, leaving rates unchanged and retaining its warning that risks were tilted toward weakness. However, it said the economic outlook had "become more promising."

A recent string of surprisingly robust U.S. data, along with Greenspan's statement earlier this month that a recovery was "well under way," has led analysts to expect the central bank will need to raise interest rates later this year to contain inflation as the economy gathers steam.

"The economy appears to have turned the corner. As a result, further rate cuts are off the table," said Brian Wesbury, chief economist at Griffin, Kubik, Stephens and Thompson in Chicago. "The Fed needs to recognize that by moving to a neutral statement."

A poll taken March 15 by Reuters showed Wall Street bond firms that deal directly with the Fed in fixed-income markets believe the Fed will not change the federal funds rate, the key overnight rate for loans between banks. But 19 of the 24 firms in the survey expected the Fed to abandon the warning about economic weakness it has maintained since December 2000.

The poll also suggested a growing belief that borrowing costs could be headed higher as early as mid-year.

The Fed, first attempting to rescue the economy from a business-led downturn and then from the shock to confidence from the Sept. 11 attacks, carried out one of the most aggressive rate-cutting sprees in its history during 2001, slashing borrowing costs by a total of 4.75 percentage points.

Banc One chief economist Anthony Chan said future rate increases would be aimed at returning the very low fed funds rate to a more normal level to accommodate solid but not excessive growth.

Reuters and the Associated Press contributed to this report.