Fed Keeps U.S. Rates Steady, But Eyes Slowdown Risks

In a key policy shift on the U.S. economic outlook, the Federal Reserve Board decided Tuesday to hold short-term U.S. interest rates steady for now but said risks from economic weakness loom larger than before. That turn away from a focus on inflation pressures — which dominated the Fed’s thinking during 1999 and 2000 — lays the basis for the Fed to cut interest rates in the near future.

An interest rate cut would be welcome news for the trucking industry, which has seen a broad-based slowdown in shipment activity and has felt the pinch of high fuel prices. The costs of debt on high-dollar trucking equipment means the industry is very sensitive to any turn in interest rates. The Fed’s signal about its future direction could even by itself prompt market-set interest rates to fall further in coming weeks.

Some analysts had predicted the Fed might formally ease monetary policy and cut rates on Tuesday, but most had said that would be too sharp a policy turn for the usually cautious central bank. Just in November it had kept its policy bias aimed at inflation risks, a stance that would argue for keeping rates higher longer.

However, a slew of weaker economic signals since then — from falling industrial output and a slew of layoffs to flat holiday-season sales — prompted observers to warn that the economy has already slowed faster than the Fed intended, and now needs stimulating with rate cuts.

Those reports confirmed the freight weakness that trucking companies were already observing, and suggested further weakness would develop in coming months.

The Fed statement marked the first time in two years that the Fed has moved toward possible rate cuts. It lowered rates three times in the fall of 1998 in the wake of a global economic crisis, but then held rates steady until it began a yearlong series of rate hikes in May 1999.

With the new policy view that the risks of economic weakness pose a greater threat than inflation, the Fed’s policy committee could cut rates at its next meeting in January. However, the shift in outlook also means that Fed Chairman Alan Greenspan would have the authority to initiate a cut earlier if he thought conditions warranted such a move.