Fed stays put on rates
but leans toward hike

The announcement deflates a stock rally
and sends the Dow down 16.52 points

Star-Bulletin news services

WASHINGTON -- The Federal Reserve decided today that inflation is not enough of a threat to justify an immediate increase in interest rates.

But Fed officials put financial markets on notice that higher rates are likely in coming months, warning of the "need to be alert" to possible inflationary pressures.

Stocks gave up some gains immediately after the Fed announcement and long-term interest rates turned higher in the bond market.

The Dow Jones industrial average, up more than 60 points just before the Fed announced its decision, was down more than 110 within 20 minutes.

But it rebounded by the close and ended down 16.52 to close at 10,836.95.

Broader market indexes also ended lower, but off their lows of the day.

Yields on 30-year Treasury bonds, at 5.85 percent before the announcement, quickly rose to 5.89 percent.

"The economy may be over the speed limit, but the Fed let us off with a warning," said Barry Evans, senior vice president of John Hancock Funds in Boston.

The Federal Open Market Committee, composed of Fed board members and regional bank presidents, ended closed-door discussions with a decision to leave the target for the federal funds rate, the interest that banks charge each other, unchanged at 4.75 percent.

But Fed policy-makers announced they had revised their policy bias the central bank was leaning toward an increase in rates in coming months should inflationary pressures increase.

This marked the Fed's first use of a new procedure, put into effect in December, by which the central bank immediately informs the public of major shifts in its views about the balance of risks to the economy. In the past, the central bank has waited eight weeks before revealing in its minutes any changes in its policy bias.

While the announcement comes only days after the government reported its Consumer Price Index rose in April by the largest amount in nine years, it doesn't guarantee the Fed will raise the overnight loan rate any time soon.

"There's no need to panic," said Greg Jones, chief economist at Briefing.com in Jackson, Wyo. "This is the 15th tightening bias since July 1996 and only once have they actually tightened. Until we see something on inflation it's not going to happen."

The Fed's next interest rate meeting is June 29-30. While some economists believe a rate hike could occur then, many believe the central bank will wait until its August meeting to start raising rates if the economy has not slowed enough on its own and inflationary pressures are building.

On Wall Street, the Standard & Poor's 500 index fell 6.17 to 1,333.32, and the Nasdaq composite index dropped 3.48 to 2,558.36.

Decliners led advancers by a 7-to-6 margin on the NYSE, with 1,576 down, 1,366 up and 571 unchanged. NYSE volume totaled 742.75 million shares vs. 668.14 million yesterday.

The NYSE composite index fell 2.73 to 634.19; the American Stock Exchange composite index lost 2.22 to 782.72; but the Russell 2000 index of smaller companies rose 1.10 to 442.45.