Fed Keeps Rates Unchanged

As expected, the Federal Reserve opted Tuesday to leave the federal funds rate unchanged at its lowest level in 40 years, giving Americans an incentive to keep on spending and businesses a motivation to step up investment in new equipment and plants.

Policymaking members of the Federal Open Market Committee voted unanimously to keep its trendsetting federal funds rate for overnight loans between banks at 1.75 percent. The more symbolic discount rate was also unmoved at 1.25 percent.

In a statement issued after the meeting, policymakers cited an "uncertain" outlook for final demand and said risks remained balanced between inflation and recession.

Calling current monetary policy "accommodative," the Fed said that since its March meeting, the economy had nevertheless received a substantial push from a "marked swing in inventory investment."

The Fed's decision to leave rates alone comes as the economic recovery, which started out at a sprinter's pace, appears to be slowing to a jog.

The economy broke out of the doldrums in the first quarter, growing at an annual rate of 5.8 percent, its strongest performance in more than two years and confirmation that last year's recession is history.

Just two months ago, many economists, buoyed by forecasts of a sizzling first-quarter growth, were predicting the Fed's first rate increase could come as early as May.

However, many economists believe the economy is growing at a more moderate rate of 3 percent to 3.5 percent in the current quarter. Recent economic reports that showed a slower growth in manufacturing, weaker home sales and construction activity and higher unemployment are consistent with that forecast.

Even with the rebound slowing, economists said they weren't worried that the economy might backslide into a downturn, a "double-dip" recession.

Since the recovery has been spotty and inflation remains under control except for a burst of recent energy price increases, economists expect the Fed to wait at least until August or September to begin raising interest rates.

"The last thing the Fed wants to do is act prematurely and send the economy back into recession -- the proverbial 'double dip,"' said Richard Yamarone, Chief Economist at Argus Research in New York.

Fed Chairman Alan Greenspan has said that for a sustainable and robust recovery, the stimulative impact of inventory drawdowns must be replaced by demand vigorous enough to spur business investment and fatten company profits. The booming pace of first-quarter gross domestic product growth is seen as unlikely to be repeated during the balance of the year.

Greenspan told Congress on April 17 that there will be "ample opportunity" to start raising interest rates once there was clear evidence that a sustained recovery had taken hold.

The Fed slashed the funds rate 11 times last year to rescue the economy from the clutches of a recession that began in March 2001. The last rate cut came Dec. 11, which pushed the funds rate down to the current 1.75 percent.