Federal Reserve policymakers increasingly appear poised to keep interest rates untouched for all of 2007 as they express continued concern about inflation in a subpar economy.
In a unanimous vote, Fed officials last week left their target for short-term interest rates at 5.25 percent. The Fed has left rates alone for seven consecutive meetings after raising them 17 times from 2004 to 2006. Caught between persistent inflationary pressures and a slowing economy — distinct trends with opposite interest rate prescriptions — Fed officials are expected to keep rates unchanged all year, according to a survey of 53 economists April 20-25. Fed policymakers have not had a calendar year in which they have not changed interest rates since 1993.
“The Fed is recognizing the economy has slowed down, but they want to sit through this adjustment,” says Diane Coe Dercher, chief economist at Waddell & Reed Investment Management. At the same time, “Inflation is a little bit higher than they want to see, but they are not going to overreact.”
Says David Kelly, chief economist at Putnam Investments, “It’s a perfect recipe for doing nothing.”
In its statement last week, Fed Chairman Ben Bernanke and his colleagues said, “Economic growth slowed in the first part of this year and the adjustment in the housing sector is ongoing.” But they also expressed optimism, saying, “The economy seems likely to expand at a moderate pace over coming quarters.”
