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Economy in Brief

Federal Funds Rate Steady at 5.25%
by Tom Moeller August 8, 2006

The Federal Open Market Committee held steady the target interest rate for Federal funds at 5.25% at today's meeting. Voting against the decision, after seventeen 25 basis point increases since June 2004, was Jeffrey M. Lacker who preferred an increase of 25 basis points in the federal funds rate target.

The discount rate also held steady at 6.25%.

Today's decision was widely expected by analysts.

The Fed's rationale for leaving rates unchanged was that "Economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices."

Moreover, "... inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand."

For the complete text of the Fed's latest press release please follow this link.

The accompanying chart plots the U.S. economy's actual rate of growth versus its so called "potential", i.e., growth in the labor force plus the growth in labor's productivity. The figures are updated for this morning's downward revisions to recent productivity and indicate that GDP growth of 3.5% trailed its potential of 4.0%.

The Taylor Rule: A Guidepost for Monetary Policy? from the Federal Reserve Bank of Cleveland can be found here.

Monetary Policy in a Global Environment from the Federal Reserve Bank of San Francisco is available here.

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