Federal Reserve Holds Rates at 5.25%

WASHINGTON, DC-To the surprise of few, the Federal Reserve voted Wednesday to hold interest rates steady for the future.

The decision comes on the heels of a dynamic period on Wall Street, with an unusually exuberant Dow on a streak of upticking days and record-piercing highs.

Many analysts and commentators have looked to 2007 as a likely time for the Federal Open Market Committee, which sets these rates, to finally ease its hold on interest rates, but Federal Reserve Chairman Ben Bernanke has aggressively run a tight ship on the matter, citing continued worries regarding inflation. Bernanke's leadership has proven invaluable; the economy is slowing at an acceptable pace, leading to an oft-referenced 'soft landing' for a market in search of stability. Still, some hope to stimulate growth, particularly given a weak housing market and slow job creation. The decision on interest rates rests on whether the Committee fears slow growth or potential inflation more; historically, Bernanke has stressed inflation repeatedly, and the majority has followed suit, though 2007 promises to be less focused on inflation than the rate-hike-festooned 2006.

"All measures of inflation are slightly above Fed comfort level," explained John Norris, a chief economist at Morgan Stanley. "If we start seeing unemployment approaching 5% and the jobs number comes in consistently weaker than expected, then maybe the Fed has to take a look at it."

Unemployment is set to rise over the course of the year to come, particularly in light of weakness in the housing and automotive sectors that could carry over to other markets.

At last measure by the Fed's preferred methodology-tracking consumer goods outside of food and energy-core inflation over the course of the past year was at 2.1%; the 'comfort zone' that leading economic policymakers hope to see inflation at is between 1 and 2 percent. "If that thing gets down to two or less than two, then the Fed can declare victory," explained John Silvia, chief economist at Wachovia.

Prior to Wednesday's meeting, the Federal Open Market Committee's last review of the matter was in mid-March, where, again, rates were held steady in the face of inflation concerns. The next such meeting will take place over June 27^th and 28^th of this year. The Federal Reserve convenes eight such meetings per year; analysts suggest that the meeting scheduled for August 7^th would be the earliest one could expect to see ground gained for lowered interest rates.

Source

CNN: "Special Report: Fed Focus", May 9, 2007
CNN: "Fed leaves rates alone - again", May 9, 2007