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Federal Reserve Leaves Short- Term Interest Rates Untouched

By Peter G. Gosselin
LOS ANGELES TIMES -- WASHINGTON

Federal Reserve policy-makers decided Tuesday to keep short-term interest rates at 6.5 percent for a third month running, saying the United States’ economic growth is beginning to slow to a more sustainable pace.

Although the Fed included a stern warning about the risk of resurgent inflation, policy-makers suggested they think they are finally getting a handle on the danger of higher prices. That’s a change from earlier this year when officials said the economy seemed to be shrugging off Fed-engineered rate hikes and continuing to boom beyond its limits.

In a statement explaining its decision, the Federal Open Market Committee said recent economic statistics indicate that “expansion of aggregate demand is moderating toward a pace closer to the rate of growth of the economy’s potential to produce.”

The central bank’s policy-making body also said improvements in productivity, or output per worker, are raising the economy’s “potential growth rate as well as containing costs and holding down underlying price pressures.”

The Fed decision, which was expected, leaves the federal funds rate -- the rate at which commercial banks make short-term loans to each other -- at its highest level in nine years. Since June of last year, the Fed has raised the rate six times by a total of 1.75 percentage points. Those moves have driven up the cost of borrowing for everything from cars to capital equipment.

Tuesday’s decision was widely interpreted as signaling that, absent unexpected change, the Fed will sit out the rest of the presidential election campaign and perhaps the remainder of the year.

Investors greeted the action tepidly. The Dow Jones industrial average rose 59.34 points, or 0.5 percent, to 11,139.15, while the tech-heavy NASDAQ Composite Index inched up 5.12 points, or 0.1 percent, to 3,958.27.