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Fed holds line on short-term interest rates

With the economy said to be at a turning point, the Federal Reserve decided yesterday to keep short-term rates at their lowest level in 45 years, reflecting continued anxiety about economic prospects.

Economists say the Fed's decision to keep the federal funds rate, which banks charge each other on overnight loans, at 1 percent, coupled with President Bush's $350 billion tax cut signed into law last month, should help the economy gain strength in the second half of the year.

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But uncertainty about jobs and recovery remains politically potent enough that Bush is convening today with his economic advisors at his ranch in Crawford, Texas. A recent poll by the Pew Research Center indicated that Bush, though still popular after the war on Iraq, is vulnerable on the economy 15 months before the 2004 presidential election.

"The economy is coming along fine, but the average American won't feel it until hiring picks up, and that won't happen until growth picks up more," said James E. Glassman, senior economist at J.P. Morgan Chase & Co. in New York.

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"Consumer confidence is starting to do better, although people have very little good to say about their job opportunities," he said. "Businesses are still cautious, but spending is starting to pick up."

A national poll released last week by the Pew Research Center said that Bush's approval rating dipped to 53 percent from 58 percent last month. Moreover, the number of people who responded that Bush should devote more attention to the economy than to the war on terrorism was up markedly from previous polls. More than twice as many now say it is more important for Bush to focus on the economy than on the war on terrorism. Before the war in Iraq, more people wanted Bush to focus on terrorism than on the economy, although not by as great a margin as exists now between the two issues, according to the poll.

Economists, meanwhile, say the recovery is gaining ground. With its announcement yesterday, the Fed indicated that it plans to keep interest rates low for some time so as not to obstruct the path of recovery.

Wall Street welcomed that news. The Dow Jones industrial average closed up 92.71 points yesterday at 9310.06. The Nasdaq stock market closed up 25.5 points to close at 1687.01. And the Standard & Poor's 500 closed up 9.76 points to 990.35.

Economists said the announcement was phrased to signal bond traders that the rate will hold. Higher rates could lead to a drop in bond prices, a further increase in bond yields and ripple effects in the economy that could reduce the borrowing power of businesses.

"The Fed has a difficult task in that it wanted to create some enthusiasm for the recovery of the economy, but it didn't want to say anything that would cause bond yields to rise more than they have since the [Fed's] June meeting, which might produce a stumbling block for the economy," said Ken Mayland, an economist for Clearview Economics in Pepper Pike, Ohio.


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