Fed Holds Funds Rate At 1.75%, Switches To Neutral Stance

By John S. McClenahen Chairman Alan Greenspan and his nine colleagues on the Federal Open Market Committee (FOMC) surprised no one on March 19. They held the influential federal funds rate at 1.75% for the second time this year. But in contrast to their previous bias toward stimulating U.S. GDP growth, the FOMC members are now neutral on the risks of too much inflation and too little growth. "The committee believes that, for the foreseeable future, against the background of its long-run goals of price stability and sustainable economic growth . . . the risks are balanced with respect to the prospects for both goals," the FOMC stated in characteristic convoluted language. Depending upon what happens to the U.S. unemployment rate, now at 5.5%, the hold on short-term interest rates could be short-lived, however. Futures markets suggest the FOMC will boost the federal funds rate at its next scheduled meeting on May 7. DRI/WEFA, a Lexington, Mass., economic forecasting firm, figures the increase, of 25 basis points, will come seven weeks later at the FOMC's June 25-26 meeting. Bruce Steinberg, chief economist at Merrill Lynch & Co., New York, is more cautious. "If the unemployment rate edges up during the next couple of months, as seems likely, the Fed probably won't tighten until August," he predicts. Nevertheless, Steinberg expects the federal funds rate to be up to 2.75% or 3% by year-end.

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