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Economy in Brief

Federal Funds Rate Again Held at 5.25%
by Tom Moeller September 20, 2006

The target interest rate for Federal funds was again held steady at 5.25% at today's meeting of the Federal Open Market Committee. Voting against the decision for the second time was Richmond Federal Reserve Bank President Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target.

The discount rate also was held steady at 6.25%.

Today's decision was widely expected by analysts.

The Fed's rationale for leaving rates unchanged indicated that "The moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market."

Need for further rate increases was stressed by the Fed. "The extent and timing of any additional firming that may be needed to address these (inflation) risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."

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 during the last two quarters versus its so called "potential", i.e., growth in the labor force plus the growth in labor productivity. The economy's potential for 4% growth was exceeded slightly in the first half due to the 5.6% surge in 1Q'06 growth.

Knut Wicksell: The Birth of Modern Monetary Policy from the Federal Reserve Bank of Dallas can be found here.

Modern Macroeconomics in Practice: How Theory is Shaping Policy from the Federal Reserve Bank of Minneapolis is available here.

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