Fed Leaves Rates Alone

May 4, 2004 (PLANSPONSOR.com) - While U.S. Federal Reserve officials on Tuesday opted to keep interest rates at 46-year lows, they signaled they may be taking a different monetary stance in coming months.

In its traditional post-meeting announcement, the Federal Open Market Committee (FOMC) for the first time dropped references to deflation as a key risk, leading Fed watchers to conclude members were preparing the markets for the first rate rises in four years. “The risks to the goal of price stability have moved into balance,” the FOMC said in its statement.

In the announcement that key short-term rates would stay at 1% for now, gone were prior references about how economic forces allowed the FOMC to be patient in deciding to send rates upward.

The only specific guidance FOMC members gave about rate hikes was that they saw no need for quick and drastic action. “At this juncture, with inflation low and resource use slack, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured,” the statement said.

“The evidence accumulated (since the last FOMC meeting) indicates that output is continuing to expand at a solid rate and hiring appears to have picked up,” members said in Tuesday’s statement. “Although incoming inflation data have moved somewhat higher, long-term inflation expectations appear to have remained well contained.”

The FOMC’s decisions are relevant to plan sponsors because the interest rate on loans in many plans is tied to the Prime Rate.