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Fed continues with steady rate policy

By T.K.MALOY, UPI Deputy Business Editor

WASHINGTON, Jan. 28 (UPI) -- The Federal Reserve kept interest rates unchanged Wednesday, noting that continued U.S. economic improvement still needs to gain futher momentum, particularly on the jobs front.

The Fed said that though "hiring remains subdued" there were indications that pointed towards an improvement in the labor market.

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Policymakers of the Federal Open Market Committee voted unanimously to keep the federal funds target rate, the interest rate that banks charge each other on overnight loans, at 1 percent, its lowest level in 45 years, where it has been since June 25. Since January 2001, the Fed had cut interest rates 13 times in an effort to keep the economy from sagging in a recession. Aggressive rate cuts have been seen as critical to ensure that economic growth did not fall further following the terrorist attacks of September 2001 which roiled an already uncertain economy.

"The committee continues to believe that an accommodative stance of monetary policy, coupled with robust underlying growth in productivity, is providing important ongoing support to economic activity," said the Fed in a statement. "The evidence accumulated over the intermeeting period confirms that output is expanding briskly. Although new hiring remains subdued, other indicators suggest an improvement in the labor market. Increases in core consumer prices are muted and expected to remain low."

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The two primary tasks for the U.S. central bank are to ensure economic growth and keep inflation/deflation under control, the latter of which the Fed noted in its statement were equally balanced. The central bankers also signaled that there will be no changes in the key interest rate during the near term.

"The committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal," said the Fed in its statement. "The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation. With inflation quite low and resource use slack, the committee believes that it can be patient in removing its policy accommodation."

The policymaking FOMC meets eight times a year in order to determine the near-term direction of monetary policy. Changes in monetary policy are announced immediately after FOMC meetings.

The interest rate set by the Fed, the federal funds rate, serves as a benchmark for all other rates. A change in the fed funds rate, the lending rate banks charge each other for the use of overnight funds, translates directly through to all other interest rates from Treasury bonds to mortgage loans.

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Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, fewer homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels.

This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the stock market, while lower interest rates are bullish.

The FOMC next meets on March 16.

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