WASHINGTON (AFP) - After holding rates steady for a year, the Federal Reserve will likely sit on its hands for a time longer as it tries to steer through risks of inflation and a potential housing-led economic downturn, analysts say.
On Thursday, the Federal Reserve headed by Ben Bernanke kept its base interest rate steady at 5.25 percent Thursday, while citing modest improvement in the overall economic picture, both on the growth and inflation fronts.
The Fed announcement, which had been widely expected, extends the pause on rate actions since last June and was accompanied by small changes in the language of the central bank statement.
The Federal Open Market Committee said inflation remains its "predominant policy concern," and noted that economic growth has picked up a bit from a soft patch early this year.
Some analysts say the Fed appears vindicated for holding rates steady over the past year and highlighting inflation risks, even as some analysts called for a rate cut. Now, the Fed is likely to be cautious before taking its next step.
Sal Guatieri, economist at BMO Financial Markets, said the Fed appears to be stuck in a situation where it is riskier to move rates than to do nothing.
"I'd say the risks to the economy are on the downside but risks to inflation are on the upside," he said.
"If the Fed cuts interest rates and props up the housing market, it risks fueling inflation. But if it raises interest rates to dampen inflation it risks collapsing the housing market and triggering inflation. Under those conditions the best thing for the Fed is to do nothing."
FOMC members "are certainly downplaying the improvement in core inflation and not showing a lot of concern about the shaky housing market," said Guatieri.
"They see an economy that is grinding through the housing slump and is poised to return to normal growth later this year."
Guatieri said he believes this is the most likely scenario but that he and some other analysts are "a little more worried about the housing situation than the Fed appears to be."
Some analysts say the Fed may be playing its cards close to the vest but could be preparing a rate cut, in view of the slump in housing that could eventually spread to the rest of the economy by curbing consumer spending.
"The FOMC's sunny expectations are evident" in the latest statement, said Asha Bangalore of Northern Trust Global Economic Research.
But Bangalore added: "We are less optimistic about the growth path of the economy in the rest of 2007 and expect the Fed to start lowering the federal funds rate at the October 30-31 FOMC meeting."
Eugenio Aleman, senior economist at Wells Fargo Bank, said he does not believe the Fed is sending any hidden signals.
"I think what they say is what they believe. I think they still remain very, very concerned about inflation," Aleman said.
"Consumer demand is strong, resource utilization is strong, gasoline costs are higher -- that's the perfect cocktail for higher inflation."
Aleman said he sees a rate cut as highly unlikely, arguing that the housing crisis is the result of too much easy money.
"There is no way the Fed is going to throw more fuel into the housing fire," he said, pointing to the problem of a large number of low-quality "subprime" loans going bad.
"The whole subprime issue has been created by a long period of very low interest rates and I don't think the Fed is ready to give up and cut interest rates again."
"I don't see any chance of a rate cut unless the economy goes into recession," he added.
Aleman said he sees "a period of wait and see for the rest of this year and perhaps the first half of 2008." At that point, "if the economy starts to accelerate we might see a rate hike."