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The federal funds rate will remain at a 41-year low as fears of war with Iraq and rising oil prices hamstring the economy.
©Associated Press
January 30, 2003
WASHINGTON -- The Federal Reserve held a key interest rate steady at a 41-year low Wednesday, with the hope that will spur more spending and investment by consumers and businesses and help lift the economy out of the doldrums.
After a two-day meeting, Fed chairman Alan Greenspan and his Federal Open Market Committee colleagues, decided to leave the federal funds rate unchanged at 1.25 percent. The funds rate is the interest banks charge each other on overnight loans and is the Fed's primary tool for influencing economic activity.
The vote was unanimous.
The Fed said that rising oil prices and geopolitical risks -- a reference to a possible war with Iraq -- have restrained spending and hiring by businesses.
However, "as those risks lift, as most analysts expect, the accommodative stance of monetary policy, coupled with ongoing growth in productivity, will provide support to an improving economic climate over time," the Fed said in a statement following its first meeting of this year.
On Wall Street, stocks had a muted reaction to the Fed's decision. The Dow Jones industrial average closed up 21.87, or 0.3 percent, at 8,110.71.
Holding the funds rate steady means that commercial banks' prime lending rate -- the benchmark for many consumer loans -- will also remain at 4.25 percent, the lowest level since May 1959.
Both the funds rate and the prime rate, which move in lockstep, were pushed down to their current low levels in November when the central bank decided to slash the funds rate by a bold half a percentage point, marking its first and only rate reduction in 2002.
That rate cut was preceded by a 11 rate reductions in 2001, as the Fed sought to rescue the economy from the clutches of a recession that began that year.
Wednesday's decision to leave the funds rate unchanged comes as the economy struggles to get back on sure footing. Worries about a possible war with Iraq are making consumers and businesses cautious and feeling less confident about the economic climate. The job market remains stagnant and the stock market has taken investors on a turbulent ride.
With the aim of energizing the economy, President Bush has offered a 10-year, $674-billion tax-cut proposal. Democrats have their own smaller-scale plans.
Leaving borrowing costs low might motivate consumers to keep on spending and businesses to step up investment during these muddled economic times, something that would bolster economic growth, analysts say.
Throughout last year, economic growth was uneven, with a quarter of strength followed by a quarter of weakness.
Economists say the economy needs a sustained turnaround in business investment. Businesses, worried about a possible war with Iraq and other uncertainties, have been in no mood to go on hiring sprees or buying binges when it comes to capital investments in plant and equipment.
"There is tremendous uncertainty right now among businesses -- they just don't want to make commitments," said Sung Won Sohn, chief economist at Wells Fargo. "As soon as we put a closure to this geopolitical uncertainty, the better off we will be."
But economists are keeping a wary eye on consumers' behavior. Americans' sinking confidence in the economy raises new questions about their appetite for spending in the months ahead.
The Conference Board's Consumer Confidence Index fell in January for the second straight month, weighed down by worries about a war.
If the country goes to war with Iraq and the United States scores a quick win, then the Fed will probably stay on the sidelines for a while and possibly raise rates in the early fall, economists said. But if a war dragged on or produced a big rise in energy prices, there's the chance the Fed might cut rates.