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Steady Fed still sees inflation risks:

FOMC holds rates steady, sees moderate pace of growth:

By Greg Robb, MarketWatch
Last Update: 2:15 PM ET Dec 12, 2006

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WASHINGTON (MarketWatch) - The Federal Reserve held overnight interest rates steady at 5.25% on Tuesday and held open the door to further rate increases if inflation doesn't come down.

In its last meeting of the year, the Federal Open Market Committee gave no hint that it would cut rates any time soon, as markets now expect.

The key statement was unchanged. "Some inflation risks remain," the committee said.

"The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

The committee said growth had slowed, "partly reflecting a substantial cooling of the housing market." The word "substantial" is new to the statement. And "although recent indicators have been mixed," the Fed said it expects a moderate pace of growth.

This is the fourth straight meeting with no change in monetary policy. It follows rate hikes at an unprecedented 17 consecutive policy-setting meetings from June 2003 to June 2006.

The decision to stand pat was no surprise. Ahead of time, economists were in agreement that the FOMC would keep rates steady. While there are cross currents in the economic data, most economists believe growth will slow modestly through the first half of next year, bringing down core inflation rates that Fed officials say are too high.

In his latest remarks on the economy two weeks ago, Fed Chairman Ben Bernanke said the economy continues to grow, outside the housing and auto sectors. He said inflation remains the key risk.

The financial markets, as implied by the federal fund futures market, are betting that interest rates have already hit their peak. The market expects two or three rate cuts in 2007.

Several economists who had been expecting further Fed rate hikes have been scaling back their forecasts of tightening.
For instance, only three members of a 25-member panel of economists of the Securities Industry and Financial Markets Association expect any more rate hikes. Most economists in the group expect only one or two rate cuts. One economist expects dramatic rate cuts, with the federal funds target rate falling to 4.0% by the end of 2007.

Jeffrey Lacker, the president of the Richmond Fed, dissented for the fourth meeting, voting to raise rates by a quarter of a percentage point. Lacker has said inflation remains too high. But this is Lacker's last vote at a policy meeting until 2009.
Under the Fed's rules that shift four of the five votes of Fed presidents on the 12-member voting committee, the voting members in 2007 will be Thomas Hoenig, president of the Kansas City Fed; Cathy Minehan, president of the Boston Fed; Michael Moskow, the president of the Chicago Fed; and William Poole, the president of the St. Louis Fed. The president of the New York Fed, currently Timothy Geithner, is always a voting FOMC member.

Greg Robb is a senior reporter for MarketWatch in Washington.