The Federal Reserve's Open Market Committee Wednesday, citing its continuing concerns over inflation, decided unanimously to maintain the overnight funds rate at 5.25%, signaling that no rate cut should be expected anytime soon.
In its statement, the Fed OMC said, "Economic growth slowed in the first part of this year and the adjustment in the housing sector is ongoing.Nevertheless, the economy seems likely to expand at a moderate pace over coming quarters."
It continued, "Core inflation remains somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures. In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."
Arun Raha, Swiss Re's Senior US economist, said of the Fed's decision, "This was expected.Growth has weakened, but inflation has not fallen enough, so the Federal Reserve Board will hold interest rates constant at 5.25% for some more time. Slowing economic activity is helping ease inflationary pressures, but the decline in inflation has not been sufficient for the Fed to cut rates. By mid-year, core CPI inflation is expected to fall close to 2.0%, allowing the Fed to ease in August. With housing continuing to decline, business investment fairly flat, and softening consumer spending, real GDP growth in the current quarter will almost certainly be sub-par. Slowing growth and the inverted yield curve are keeping the risk of recession near 35%. Housing is expected to stabilize in the second half of 2007, which will improve real GDP growth. Growth outside of the US is solid, and because of the relatively weak US dollar is helping reduce the risk of US recession, by keeping external demand strong."