Fed Leaves Rates Unchanged

In a widely expected decision, the Federal Reserve on Wednesday opted to leave borrowing costs steady at four-decade lows, biding their time as they await signs that a full-throttle recovery is in place.

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 two-day meeting.

The more symbolic discount rate, charged to banks for loans directly from the Fed, was also unmoved at 1.25 percent. 

In its statement, the Fed acknowledged that the economy had softened after an inventory-led bounce in the first quarter. But it expressed cautious optimism about quarters to come. 

"The committee expects the rate of increase of final demand to pick up over coming quarters, supported in part by robust underlying growth in productivity, but the degree of the strengthening remains uncertain," the statement said. 

The statement said risks were equally balanced between economic weakness and a flare-up in inflation, a stance unchanged from the last meeting on May 7, but economists said its overall downbeat tone indicated no rate increases were likely in the imminent future. 

"There is a hint that they do not see any reason to tighten in the near term," said Alan Ruskin, research director at 4Cast Ltd. in New York. "They are moderating the perception of an (economic) upside and moderating expectations of a Fed tightening further out as well." 

U.S. interest rates have stood at this level since last December and most economists believe the central bank will not raise borrowing costs until near year-end. The decision came amid growing market unease stemming partly from a mounting toll of accounting scandals and with the economy still edging ahead only unevenly. 

The latest Reuters poll of 22 economists that deal directly with the Fed in money markets showed they unanimously expect no change in rates at Tuesday and Wednesday's meeting. Most firms do not see a rate increase until November and a few said borrowing costs would not go up at all this year. 

There is even some talk in financial markets that the Fed could possibly ease later in the year if the economy does not begin to regain its stride.

"Fed officials must be growing a bit concerned about the state of the recovery," said Mark Zandi at Economy.com. "If we get another month or two of slumping equity prices, people might begin to anticipate another round of Fed easing."

The Fed cut rates 11 times last year by a total of 4.75 percentage points to revitalize the flagging economy. 

A general sense of queasiness in financial markets, prompted partly by a seemingly unending series of accounting scandals, concern over corporate profits and a weakening dollar, has cast a shadow across a generally favorable second-half economic outlook. 

The latest shock came on news that telecommunications giant WorldCom would restate its results for 2001 and the first quarter of 2002 to show losses. 

Analysts said this could turn out to be one of the biggest accounting frauds in U.S. history -- a fresh blow to investor faith in the integrity of the world's most liquid markets and a development that could push rate rises even further into the future.

Reuters and the Associated Press contributed to this report.