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Fed keeps key rate at record low

That news along with higher consumer confidence sends the Dow soaring 140 points.

By wire services
Published October 29, 2003

WASHINGTON - The Federal Reserve kept short-term interest rates at just 1 percent Tuesday afternoon and suggested that it would continue to do so for at least the next several months.

That news, combined with reports that consumer confidence rebounded in October and orders for durable goods such as appliances rose 0.8 percent in September, sent the Dow Jones Industrial Average climbing 140 points to 9,748, its best advance in a month. The Nasdaq composite index gained 49 points to 1,932, notching its best gain in nearly four months, while the Standard & Poor's 500 rose 16 points to 1,047, its strongest advance in a month..

Fed chairman Alan Greenspan and his Federal Open Market Committee colleagues - the group that sets interest rate policy in the United States - said in a statement accompanying Tuesday's decision that the panel was optimistic for the first time this year about job creation and employment, saying that "the labor market appears to be stabilizing."

But the Fed made no mention of the fact that economic growth appears to have accelerated during the third quarter of this year to an annual pace of 6 percent and possibly more. That would be the fastest pace since the 7.1 percent rate in the last quarter of 1999. The Commerce Department will release the first official GDP estimate for the third quarter Thursday.

An abundance of data over the last several months shows that consumer spending surged ahead during the summer, and business executives have become far more confident that demand for manufactured goods will continue to be strong at least through the end of the year.

Except for its acknowledgment that the labor market is stabilizing rather than "weakening," as the central bank said last month, the Fed repeated its assertion that its current easy-money policy "can be maintained for a considerable period."

As it has for the last several months, the Fed said Tuesday it was more worried about inflation being too low than too high.

"Business pricing power and increases in core consumer prices remain muted," the central bank's Federal Open Markets Committee said. "On balance, the risk of inflation becoming undesirably low remains the predominant concern for the foreseeable future."

Tuesday's decision essentially preserves the Fed's open-ended commitment to keep its target for the overnight federal funds rate at its lowest level in more than four decades.

But many economists believe the Federal Reserve is under growing pressure to signal a gradual shift in policy. With the American economy growing faster than most forecasters had expected just a few months ago, the question coursing through financial markets is when the central bank will have to start pulling back once again.

The Conference Board, a private research organization, reported that its Consumer Confidence Index rose to 81.1 in October, up from a revised 77.0 in September. The reading was well ahead of the 80.0 that analysts had been expecting and came after a decline in September.

Economists keep a careful watch on indicators of consumer confidence since spending by consumers makes up approximately two-thirds of U.S. economic activity. The improvement in the indicator could be a good sign for major retailing companies just ahead of their critical holiday shopping season.

The Conference Board's measure of consumer confidence has fluctuated in a tight range since April, when it rebounded strongly following the end of major military operations in Iraq. Before that, it had been declining steadily since the spring of 2002.

"This kind of roller coaster ride is very common when you're coming out of a recession," said Lynn Franco, director of the board's consumer research center. "I think if we get another month or two of improvement, we'll be on the path toward more sustainable gains in confidence."

The Conference Board also said an indicator measuring consumers' appraisal of current economic conditions rose in October following five consecutive months of declines. That measure, the Present Situations index, jumped to 66.8 from 59.7 last month.

Separately, the Commerce Department that factory orders for big-ticket goods rose 0.8 percent in September, reflecting demand for goods including cars, communications equipment and machinery. The "durable" goods measured by this indicator are costly manufactured products expected to last at least three years.

Economists saw the improvement as a positive sign for the manufacturing sector, which has been mired in a deep slump and has had trouble creating new jobs. The rise in September was the best showing since July.

Excluding orders for transportation equipment, which can swing widely from month to month, all other orders for durable goods rose by 1.2 percent in September, marking the fifth consecutive monthly increase.

The bounce-back comes after new orders for durable goods dipped by 0.1 percent in August, according to revised figures. Although September's increase was slightly weaker than the 1 percent advance that economists were forecasting, August's dip was revised Tuesday to show a much smaller decline than the 1.1 percent drop initially reported.

- Information from the New York Times, Knight Ridder News Service and Associated Press was used in this report.

[Last modified October 29, 2003, 01:49:08]

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