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Fed Maintains Its Key Rate and Suggests No Shift Soon

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Rotten Old Sour Puss GreenspanWASHINGTON, Aug. 12 The Federal Reserve left its overnight interest rate unchanged at 1 percent today, but it cheered financial markets by strongly suggesting that it would not raise interest rates until at least some time next year.

Today's decision almost universally anticipated by analysts and investors leaves short-term rates at their lowest levels since the 1950's.

But the Fed also gave investors a big clue about its plans for the months ahead and that clue came as a pleasant surprise to the markets.

In its statement accompanying today's decision, the policy-setting Federal Open Market Committee repeated almost verbatim its previous assessment of the economy. It added a new sentence, however, on top of its familiar formulations, declaring that "the committee believes that policy accommodation can be maintained for a considerable period."

Investors and analysts immediately pounced on that comment as confirmation that the Federal Reserve would keep interest rates low even if, as seems increasingly likely, the economy picks up speed in the next several months.

The stock market climbed modestly after the Fed's announcement. The broad Standard & Poor's 500-stock index gained 1 percent, to close at 990.35.The Nasdaq composite index rose 1.53 percent, to close at 1,687.01.

Perhaps more telling, traders bid up the price of futures contracts on the overnight federal funds rates. Where traders had given a 90 percent likelihood of a rate increase by next April, analysts said prices after today's announcement reflected only a 60 percent chance of that happening.

"The Fed is attempting to say that we have the ability to stay with these rates for a while," said James E. Glassman, senior economist at J. P. Morgan.

At the same time, the Federal Reserve reinforced the impression that officials are not inclined to take any unusual or unorthodox measures to fight the fading risk of deflation, or an across-the-board decline in prices.

Although today's statement reiterated almost verbatim past statements about the risks of an "unwelcome fall in inflation," it offered no suggestion that the central bank would lower the federal funds rate below 1 percent or that it might pump money into the economy by buying longer-term Treasury securities.

As a result, today's announcement is unlikely to reverse the recent sharp surge in rates on longer-term Treasury notes; that, in turn, has caused a rapid rise in rates for mortgage loans.

The bond market has suffered one of its worst routs in years during the past several weeks, a development that has sent home mortgage rates surging even though short-term interest rates are at their lowest level in about 45 years.

Analysts differ on who is to blame for the bond market's plunge into turmoil, but most agree that a crucial reason is either miscommunication by the Fed or misinterpretation by investors of what the Fed is actually saying about its intentions to fight deflation.

Many bond investors became convinced in May and June that the Federal Reserve was preparing to buy up longer-term Treasury bonds, a move that would allow it to keep flooding the markets with money even if the overnight federal funds rate dropped close to zero.

But those hopes waned after the Open Market Committee's last meeting, when the Fed reduced the federal funds rate by only one-quarter of a percentage point.

Any remaining hopes were dashed in July, when Alan Greenspan, chairman of the Federal Reserve Board, told a Congressional committee that there would probably be no need to resort to unconventional methods.

Paul Taylor, chief economist for the National Automobile Dealers Association, said the Fed's policy on short-term rates might even help keep longer-term rates high because it slightly increases the chance of future inflation.

"The F.O.M.C. generosity on liquidity for the economy may have the unfortunate result of keeping the 10-year Treasury rate near its current elevated levels," Mr. Taylor wrote in an assessment today. Because higher rates on mortgage loans have already slowed the trend of homeowners refinancing their homes and pulling out cash, Mr. Taylor said car sales could soon be affected.

As it has before, the Fed said that current monetary policy is relaxed enough to provide "important ongoing support to economic activity" and it said that the upside and downside risks to sustainable growth are "roughly equal."

William C. Dudley, chief United States economist at Goldman, Sachs, said the central bank seemed intent primarily on underlining Mr. Greenspan's view that inflation is not a significant risk at the moment and that the Fed can afford to keep short-term rates at extremely low levels without igniting a new round of price increases. He said he did not expect another increase until 2005.

"The markets viewed that as significant," Mr. Dudley said. "My own view is that it follows pretty logically" from statements by Mr. Greenspan as well as other top officials at the Federal Reserve.

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