Transcripts

Interest Rates Will Remain The Same

SUSIE GHARIB: No change in interest rates today by the Federal Reserve. The central bank held its key benchmark rate at 5 1/4 percent. This is the fourth straight meeting with no change in monetary policy. As Suzanne Pratt reports, economists are now beginning to speculate on what moves the Fed will make in 2007.

SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: In its last meeting of 2006, the Federal Reserve opted to leave interest rates unchanged and make only subtle adjustments to the wording of its policy statement. The widely expected decision by the Fed's committee on monetary policy keeps the Federal funds rate at 5.25 percent. The Fed has been on pause for the last four meetings, after policymakers took rates to that level in June.

STEVEN RICCHIUTO, CHIEF US ECONOMIST, ABN AMRO: I think they've left rates unchanged since the summer because there's clear evidence building that the economy was really suffering from the decline in the housing industry and the consolidation of the automobile industry. Those are two pretty weighty pieces of the economy.

PRATT: In the statement that accompanied its decision, the Fed renewed a warning that risks from inflation remain. But policymakers added the word "substantial" when characterizing the slowdown in the real estate market. The statement said, quote, economic growth has slowed over the course of the year, partly reflecting a substantial cooling of the housing market, end quote. While the bond market rallied on the substantial inclusion, some economists say the policymakers were merely tweaking their assessment of the economy.

DAVID GREENLAW, CHIEF US FIXED INCOME ECONOMIST, MORGAN STANLEY: I think what they're doing is just acknowledging that we've had a substantial cooling in housing and they're giving a backward-looking assessment of that. Most importantly, the forward-looking component of the statement continues to be pretty upbeat.

PRATT: As for monetary policy in 2007, experts say the Fed gave no hints or clues. Nevertheless, most economists believe rates will remain unchanged well into next year because the Fed will remain concerned about core inflation.

GREENLAW: The most likely scenario for the Fed at this point is for them to be on hold with a 5.25 percent funds rate for quite sometime. In fact, we see the Fed holding rates steady until very late in 2007.

PRATT: By keeping the Federal funds rate unchanged, the Federal Reserve all but guaranteed that U.S. banks will keep the prime lending rate at 8.25 percent. That's an early holiday gift for the U.S. as it gives a break to consumers and business borrowers. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.