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Fed Shifts View of Economy, Setting Stage for Rate Hike
By JEANNINE AVERSA
.c The Associated Press
WASHINGTON (March 19) - The Federal Reserve left a key interest rate unchanged Tuesday and began preparing Americans for the possibility that rates will go higher this year as the country bounces back from recession.
After 11 consecutive rate reductions last year, 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 closed-door meeting.
In January, the Fed, citing signs of an economic rebound, ended a yearlong stretch of uninterrupted credit easing when it left the funds rate unchanged.
On Tuesday, the Fed policy-makers were even more upbeat about the economy's prospects.
''The economy, bolstered by a marked swing in inventory investment, is expanding at a significant pace,'' the Fed said in a statement explaining its decision.
''Nonetheless, the degree of the strengthening in final demand over coming quarters, an essential element in sustained economic expansion, is still uncertain,'' the Fed added.
The Fed's decision means that commercial banks' prime lending rate, the benchmark for millions of consumer and business loans, will continue at 4.75 percent, a level last seen in November 1965.
Reflecting increased optimism, Fed policy-makers decided to move to a neutral policy directive, which means they believe risks to the economy are balanced equally between economic weakness and the threat of inflation. For more than a year as the country slid into recession, the Fed had said the greatest risk facing the economy was slow growth.
In explaining its policy shift, the Fed said: ''The risks are balanced with respect to the prospects for both goals.''
Economists view that as the first step toward preparing consumers and businesses - enjoying the lowest interest rates in a generation - for the possibility that interest rates may go up later this year.
Previously, the Fed's policy stance had given more attention to the economy's shortfalls. Until Wednesday's change, the Fed's policy directive had been tilted toward risks of economic weakness, something that left the door open to interest rate cuts.
AP-NY-03-19-02 1427EST
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