FOMC Leaves Rates, Economic Outlook Unchanged

(Updated from 2:14 p.m. EST)

The Fed opted to leave the key short-term interest rate at 6.5% at its latest meeting today, as it was widely expected to do. The fed funds rate has stood at that level, the highest in nine years, since May 16.

In its statement announcing the decision, the Fed's monetary policy committee continued to maintain that the risk of rising inflation is greater than the risk of an economic slowdown.

However, the Federal Open Market Committee went further than it has at any point in the last several months in acknowledging that a significant economic slowdown is underway.

"[S]oftening in business and household demand and tightening conditions in financial markets over recent months suggest that the economy could expand for a time at a pace below the productivity-enhanced rate of growth of its potential to produce," the committee said.

"Nonetheless," the FOMC statement continued, "to date the easing of demand pressures has not been sufficient to warrant a change in the Committee's judgment that against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks continue to be weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future."

Those conditions include low unemployment rates and high energy prices, it said.

What Rate Hikes Have Wrought Changes in major market indicators since the Fed started hiking
Instrument	6/29/99	11/14/00	Change	Percent Change*
DJIA	10,791.29	10,681.06	-110.23	-1.0%
S&P 500	1351.45	1382.95	+31.5	+2.3
Nasdaq	2642.11	3138.27	+496.16	+18.8
Wilshire 5000	12,584.00	12,846.73	+262.73	+2.1
Currency and Commodities
Dollar Index	117.89	124.44	+6.55	+5.6
CRB Index	189.37	225.17	+35.8	+18.9
Oil	18.44	34.87	+16.43	+89.1
Gold	260.50	265.40	+4.90	+1.9
Treasury Yields
2-Year Note	5.680%	5.902%	+0.222%	+7.2%
5-Year Note	5.820	5.714	-0.106	+8.3
10-Year Note	5.930	5.768	-0.162	+7.6
30-Year Bond	6.070	5.819	-0.251	+9.0
*For Treasury securities, percent change represents total return. Source: Reuters, Federal Reserve (dollar index), Merrill Lynch (Treasury total returns)

Some market participants thought the FOMC might declare the risks to the economy balanced in today's statement. That would have been seen as the first step in a process that could eventually lead the Fed to cut interest rates.

The FOMC's decision not to change its assessment of the balance of risks may have been influenced by the fact that the outcome of the presidential election is still up in the air. Some Fed-watchers predicted the committee would be reluctant to make a monetary policy change at a time when financial markets are coping with political uncertainty.