Transcripts

Interest Rates Remain Unchanged

SUSIE GHARIB: The Federal Reserve held steady on interest rates today and the Dow continued its record climb. The blue chip index jumped 53 points to a new all-time high. The NASDAQ rose 4 1/2. The rally came after the Fed's decision to keep its key short-term rate at 5 1/4 percent, where it stood since June of last year. Policy makers signaled that they have no plans to change rates any time soon. Suzanne Pratt reports.

SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: The simple explanation for why the Federal Reserve held interest rates steady today is that the economy doesn't need a change in monetary policy. Not only has growth downshifted this year, but the slowdown is helping to reduce inflation. While some experts believe the economy is headed for a soft landing, Dresdner Kleinwort economist Kevin Logan says the Fed is actually in somewhat of a difficult position.

KEVIN LOGAN, SR. MARKET ECONOMIST, DRESDNER KLEINWORT: There's a tug of war between the fact that the economy's growth has slowed down, but inflation is still a little bit higher than the Fed would like. So they're caught in the middle. They're not going to change interest rates right now.

PRATT: There were only subtle changes in today's policy statement from the Fed's March statement. Policy makers added quote, economic growth slowed in the first part of this year, end quote. But they stuck with their call for improved growth in the second half of this year. The Fed also made no adjustment in its inflation assessment, saying quote, core inflation remains somewhat elevated, end quote. Most economists believe that's a very deliberate signal to financial markets that policy makers have no intention of changing rates in the near term. Deutsche asked management economist Josh Feinman predicts the Fed will remain on hold at least for the rest of this year.

JOSHUA FEINMAN, CHIEF ECONOMIST, DEUTSCHE ASSET MGMT: To get them to cut rates, I think you would need to see evidence that the housing correction was spilling over more broadly into the economy as a whole, consumer spending weakening and particularly the labor market start to deteriorate.

PRATT: Others however believe policy makers will be forced to cut rates much sooner, most likely by the fall.

LOGAN: Right now the Fed funds rate is 5 1/4 percent. We expect it will be about 4 1/2 percent by the end of the year. That probably means three rate cuts of 25 basis points, so they'll cut the rate 75 basis points before the end of the year.

PRATT: The next Fed meeting will be held exactly seven weeks from today on June 27th. Experts say there would have to be a seismic shift in economic conditions for policy makers to alter rates at that meeting. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.