Fed Leaves Interest Rates Unchanged

As expected, the

Federal Open Market Committee

decided not to change the key short-term fed funds interest-rate target, currently set at 4.75%.

The FOMC also kept its neutral policy directive. Had the Fed moved its bias to tightening, favoring higher interest rates, it would have been the first instance in which officials announced such a change following the conclusion of the meeting. Previously, a change in bias remained a mystery until minutes were released a few days after the subsequent Fed meeting.

The market was not expecting an interest-rate hike, but until recently it probably would have not flinched at a change in bias. Economic data, especially recent labor reports, have been strong, and the continued run-up in equity prices boosts the hawkish members' case for tighter monetary policy.

This

Federal Reserve

has been very cautious in times of prosperity, declining to raise rates throughout last year, even after shifting to a tightening bias after the February 1998 meeting. Fed officials, who have tended to guide the market more explicitly since the trio of rate cuts last fall, have sounded more dovish in recent weeks.

"Recent experience does seem to suggest that the economy has become less inflation-prone than in the past, so that the chances of an inflationary breakout arguably are, at least for now, less than they would have been under similar conditions in earlier cycles," said Fed Chairman

Alan Greenspan

at his February Humphrey-Hawkins

testimony.

In addition, perhaps mindful of the oil spike that resulted from the Persian Gulf war in 1991, the Fed may not want to disrupt economic activity when there is still potential for a long conflict in the Balkans.

The Fed also retained the current 4.50% discount rate. The fed funds rate is the Fed's target for the rate banks charge each other for overnight loans. The discount rate is the rate the Fed charges member banks to borrow from its discount window.