WASHINGTON – The economy is in pretty good health despite the ailing housing and auto industries, allowing the Federal Reserve to feel comfortable about leaving interest rates alone.
Fed Chairman Ben Bernanke and his central bank colleagues are expected to keep their finger on the interest rate pause button when they meet Tuesday, their last such session for the year. It would mark the fourth meeting in a row in which the Fed left an important rate unchanged at 5.25 percent.
As a result, commercial banks' prime interest rate — for certain credit cards, home equity lines of credit and other loans — would stay at 8.25 percent, once again giving borrowers some breathing room.
The Fed believes slower economic growth will eventually lessen inflation pressures. Bernanke and his colleagues also are fairly confident that the slumping housing and auto sectors won't sink the economy.
To be sure, policymakers will keep close watch for any danger signs — namely a pickup in inflation or a sharper-than-expected housing swoon that could damage the entire economy and throw it into recession. For now, though, they feel it is appropriate to leave rates where they are and continue to monitor the patient.
Economists think the Fed could stay on the sidelines through much of next year.
"I suspect the Fed is on virtual permanent hold," said Gregory Miller, chief economist at SunTrust Banks Inc. "I don't think the Fed is going to change its mind about the current economic outlook until the data makes it very clear that the trends have turned. That underlying trends are moving in one direction or the other — getting better or getting worse."
Wall Street investors, however, think the economy will slow too much and that the Fed will be forced to cut rates early next year.
That view is at odds with recent remarks by Bernanke and other Fed policymakers who say there's still a chance that rates could go up next year — if needed to thwart inflation. Bernanke has given no hint that the central bank would be lowering rates any time soon.
If economic growth were faltering, the Fed would prescribe a rate cut. If inflation is threatening to flare up, the Fed would order a rate boost.
Since August, the Fed has held rates steady. Before that, though, the Fed for two years straight was hoisting rates to fend off inflation. It had boosted rates 17 times since June 2004, the longest stretch of increases in Fed history.
The Fed's goal is to slow the economy sufficiently to ward off inflation but not so much as to push the economy into recession.
The economy has been losing momentum all this year. Economic growth in the July-to-September quarter slowed to a pace of 2.2 percent, a subpar performance mostly reflecting the strain from the crumbling housing market. Growth in the current October-to-December period as well as into next year also is expected to be sluggish.
Some barometers show inflation has eased in recent months. Consumer prices actually dropped in September and October, a welcome reprieve after skyrocketing energy prices walloped consumers' pocketbooks earlier in the year. The government's next report on consumer prices will be released Friday, and economists are expecting a modest rise as energy prices have crept up again.
Still, the Fed wants to see "core" inflation — excluding energy and food prices — to come down more in the months ahead.
One inflation measure Bernanke said the Fed is keeping extra close tabs on is wages.
After a long period of sluggish wage growth, Americans' wages are starting to pick up as a solid labor market gives them better bargaining power. That's good for consumer spending — a key force keeping the economy moving along. But rapid wage growth can fan inflation fears.
Workers' average hourly earnings grew by a modest 0.2 percent, to $16.94 in November from the previous month, the government reported last week. Over the past 12 months, wages have grown by 4.1 percent.
The nation's unemployment rate in November nudged up to 4.5 percent, as hundreds of thousands of people — feeling better about job prospects — poured into the market. Even with the slight increase, the jobless rate remains low by historical standards and still points to a decent jobs climate, especially given the loss of thousands of jobs in construction and manufacturing.
"There are some pockets of weakness in housing and manufacturing activity but that is not enough to make the Fed change their course," said Richard Yamarone, economist at Argus Research.
With slower economic growth easing inflation pressures, rates on 30-year mortgages last week fell to 6.11 percent, the second lowest level of the year. Thus some borrowers are seeing benefits of lower rates even as the Fed has opted to hold its key rate steady.