Fed Stands Pat On Rates; Keeps Eye on Baghdad

March 18, 2003 (PLANSPONSOR.com) - The US Federal Reserve on Tuesday decided against tinkering with interest rates, but signaled it was ready to slash them if an Iraq war pushes an already faltering economy into a new tailspin.

With the nation on the brink of conflict, Fed officials said in a statement that they would practice “heightened surveillance”, which they said, “is particularly informative.” In the past, the Fed’s inclusion of such language often has foreshadowed rate reductions between regular meetings of its policysetting Federal Open Market Committee (FOMC). If the Fed sees the economy plummeting, the FOMC can meet for impromptu sessions – often by conference call – to change rates. The FOMC is currently scheduled to meet again May 6.

Tuesday’s decision kept the US central bank’s trend-setting federal funds rate for overnight loans between banks at 1.25%, the level it has been at since last November.

The stand pat approach gives policymakers time to gauge whether economic activity will sour when bombs begin to fall on Iraq, or snap back as some analysts predict if US forces win quickly and decisively.

At their January meeting, Fed officials kept rates steady (See Fed Holds the Line on Rates).