Standing pat: Fed holds interest rate steady at 1.25%

(December 10, 2002) In its last interest rate announcement of 2002, the U.S. Federal Reserve today left its key overnight lending rate unchanged at 1.25%, a 41-year low.

In a statement accompanying today’s decision, the Fed says that “robust underlying growth in productivity is providing ongoing support to economic activity,” suggesting that although further cuts are not necessary, the stimulus provided by the current low rate remains essential to recovery.

“The limited number of incoming economic indicators since the November meeting, taken together, are not inconsistent with the economy working its way through its current soft spot,” the agency says.

The Fed did not change its economic outlook, stating that the risks of higher inflation and weaker economic growth remain balanced.

In November, the Fed slashed rates by 50 basis points in an effort to guard against further economic weakness. However, analysts believe the Fed will continue to stand pat, at least in the short term.

“Although the Fed is expected to be on hold for much of next year, we think U.S. rates will be trending higher in the second half as the recovery in world demand gains strength, geopolitical concerns ease and confidence rises,” said RBC economist Allan Seychuk in an online commentary.

Last week, the Bank of Canada left its key lending rate unchanged at 2.75%, citing slower than expected economic growth amid geopolitical uncertainty.

Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca