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Federal reserve holds interest rates steady

WASHINGTON: The Federal Reserve opted to hold interest rates steady Tuesday amid signs the economy is on the mend after its brush with recession earlier this year.

The decision by the central bank's policy-making Federal Open Market Committee had been widely expected after it cut rates last month for the first time in nearly three years.

Fed watchers were divided over what comes next, although many were betting that the central bank would ease rates once more before year-end.

Wall Street stock prices barely budged on the Fed's decision to leave short-term rates unchanged. The Dow Jones industrial average ended 5.64 points higher at 4,620.42.

Bond prices eased slightly on light selling by some speculators disappointed by the lack of Fed action. The benchmark 30-year Treasury fell 7/32, or $2.19 on a $1,000 bond, raising its yield to 6.89 percent from 6.87 percent.

Since the Fed trimmed a key short-term interest rate by a quarter percentage point on July 6, the economy generally has been looking better. Housing starts are up and the job market has shown some signs of improvement.

But not all the news has been upbeat. Car sales remain weak, which is a cause for some concern because the automobile industry is such a large part of the economy.

The 13,500-strong National Association of Manufacturers criticised the central bank for failing to give the economy a helping hand by cutting rates further. Lower rates spur borrowing and tend to boost economic activity.

In its semiannual economic report released Tuesday, the Congressional Budget Office forecast that the central bank will allow rates to fall further in the second half of this year.

"Monetary policy is still relatively tight," the office, the research arm of Congress, said. "The Federal Reserve will ease policy even further during the second half of 1995 to achieve its goal of sustainable growth with low inflation."

The Fed wants the economy to run at its long-term cruising speed of about 2-1/2 percent, without spurring inflation.

Fed watchers said the central bank is close to achieving that goal, although some analysts think slightly lower rates may be needed to ensure that happens.

The economy grew at a scant 0.5 percent rate in the second quarter, but is widely expected to pick up steam in the latter half of 1995 and into 1996.

"It sounds a little Pollyannaish, but for the third time (since World War II) the Fed is going to be able to engineer this soft landing" for the economy, said Wayne Ayers, chief economist at Bank of Boston.

The discount rate that the Fed charges commercial banks for money currently stands at 5.25 percent. The federal funds rate, which commercial banks charge each other for overnight loans, is 5.75 percent.-Reuter