TOPICS > Economy

Fed Leaves Interest Rates Unchanged

BY Admin  March 19, 2002 at 5:45 PM EST

In a statement after the one-day meeting, the Federal Open Market Committee dropped its warning that economic weakness posed the largest threat to the nation’s financial health, saying risks were now more evenly balanced between inflation and growth.

After 11 consecutive rate reductions last year, the federal funds rate — the interest that banks charge each other on overnight loans — will remain at 1.75 percent, the lowest level in 40 years. Stocks ended slightly higher, but well off the session highs.

Analysts said the change in rhetoric is a first step for the Federal Reserve to raise rates this year.

While the Fed noted the economy is expanding, it warned that solid growth couldn’t endure without strong demand from businesses and consumers.

“The economy, bolstered by a marked swing in inventory investment, is expanding at a significant pace,” the Fed said in its statement. “Nonetheless, the degree of the strengthening in final demand over coming quarters, an essential element in sustained economic expansion, is still uncertain.”

Today’s decision was the second in a row to leave the rates unchanged. The Fed, first attempting to rescue the economy from a business-led downturn and then from the Sept. 11 attacks, slashed rates by a total of 4.75 percentage points, the most aggressive rate-reduction in history.

Despite the Fed’s decision, U.S. exports continued to suffer. America’s trade deficit surged to $28.5 billion in January as the improving economy drove up demands for foreign oil and other imports. Moreover, the global slump pushed U.S. export sales to their lowest level in more than three years.

The Commerce Department reported a deficit in January that was 15.4 percent higher than December’s trade gap of $24.7 billion.

Although the deficit narrowed slightly in 2001, the first improvement in six years, analysts said the January report supports beliefs that the U.S. trade imbalance will widen as the United States recovers faster from its recession than other nations.

American manufacturers also point to the high-flying U.S. dollar, as a problem. The U.S. dollar has risen in value by 30 percent against other currencies since 1997.

America’s largest deficit was with China. The January imbalance was $6.86 billion, an increase of 24.8 percent from the December level. America’s deficit with Japan narrowed by 5.4 percent to $4.75 billion as both exports and imports with that country dropped to their lowest levels since 1994.

The deficit with Canada, America’s largest trading partner, rose by 15.8 percent to $4.43 billion while the deficit with Mexico was up 13.6 percent to $2.27 billion. The deficit with the 15-nation European Union was up by 17.1 percent to $4.6 billion as U.S. exports to that region fell to the lowest level since July 1999.