Fed holds interest rates steady, but no word on future direction

WASHINGTON — The Federal Reserve kept interest rates steady, giving holiday shoppers a reason for some cheer. However, the Fed held back an extra gift Wall Street was hoping for: a signal that rates might actually be lowered soon.

Wrapping up their last meeting of the year, Fed chairman Ben Bernanke and all but one of his central bank colleagues agreed today to leave an important rate unchanged at 5.25 percent, the fourth straight meeting without budging the rate.

That meant commercial banks' prime interest rate — for certain credit cards, home equity lines of credit and other loans — stayed at 8.25 percent, once again giving a break to borrowers who until this summer had endured the pain of two-plus year of rate increases.

"The Fed is not acting like the Grinch this Christmas. But it is not putting presents in anyone's stocking, either," said Mark Zandi, chief economist at Moody's Economy.com.

On Wall Street, stocks dipped as disappointed investors failed to get a sign that the Fed was moving toward cutting rates. The Dow Jones industrials lost 12.90 points to close at 12,315.58.

Discussing economic conditions, Fed policy-makers said growth has slowed over the course of the year, partly reflecting a "substantial cooling" of the housing market. That description went beyond the Fed's previous assessment in late October and suggested a sharper slump in housing was taking place.

Nonetheless, policy-makers stuck with their previous judgment that the economy probably will expand at a moderate pace in coming quarters. This time they hedged their assessment a bit and noted that recent economic barometers have been mixed.

Analysts viewed the Fed's characterization of the economy's growth prospects as slightly weaker than at the previous meeting in late October.

Still, the Fed didn't hint that it would actually cut rates any time soon as some Wall Street investors would like.

Instead, it once again kept open the possibility of a rate increase if inflation should show signs of flaring up. "Some inflation risks remain," policy-makers said. "The extent and timing of any additional firming that may be needed" to address these risks would hinge on economic reports, they said.

For the fourth meeting in a row, Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, Va., was the lone dissenter. Lacker said he would have preferred that the Fed boost interest rates by one-quarter percentage point.

Looking ahead, few economists believe the Federal Reserve will boost rates. The Fed itself is betting that slower economic growth will eventually lessen inflation pressures.

To fend off inflation, the Federal Reserve had hoisted rates 17 times since June 2004, the longest stretch of increases in its history.

Since August, however, the Fed has left rates alone, giving it time to assess the full impact of its credit-tightening campaign. The goal is to slow the economy sufficiently to ward off inflation but not so much as to throw it into recession.

Many economists predict the central bank will keep rates where they are at its next session on Jan. 30-31 and at least somewhat further into the year. Then, analysts believe the Fed's next move probably will be a rate cut later in the year.

The economy has been losing momentum this year. Growth in the July-to-September period slowed to a pace of 2.2 percent, a subpar performance mostly reflecting the strain from the crumbling housing market. Growth into next year is expected to be similarly lethargic.

Some barometers show inflation has eased in recent months. Consumer prices actually dropped in September and October, a welcome reprieve after skyrocketing energy prices walloped consumers' pocketbooks earlier in the year.

Still, the Fed wants to see "core" inflation — excluding energy and food prices — come down more in the months ahead. Core inflation is still running above 2 percent — past the Fed's comfort zone.

One inflation measure Bernanke recently said the Fed is keeping close tabs on is wages.

After a long sluggish period, Americans' wages are starting to pick up as a solid labor market gives them better bargaining power. That's good for consumer spending — a key force keeping the economy moving along. But rapid wage growth can fan inflation.

The nation's unemployment rate in November edged up to 4.5 percent, as hundreds of thousands of people — feeling better about job prospects — poured into the market. The jobless rate remains low by historical standards and still points to a decent employment climate, especially given the loss of thousands of jobs in construction and manufacturing.