Fed leaves interest rates unchanged

WASHINGTON (AP) -- Most analysts believe the country will not need further interest rate reductions since the economy's vital signs are improving, but the Federal Reserve is leaving open the possibility.

Hours before the Fed announced its decision Wednesday to hold rates steady, the government reported the economy grew at a rate of 0.2 percent in the final three months of 2001, after shrinking by an annual rate of 1.3 percent in the third quarter. The news raised hopes among economists that the first U.S. recession in a decade may be ending.

"It's looking very much like the little recession that wasn't," said Tim O'Neill, chief economist at Bank of Montreal and Harris Bank. "If anything, it will be a kinder and gentler one."

In explaining their decision to leave rates alone after 11 consecutive reductions last year, Fed Chairman Alan Greenspan and his colleagues offered a more positive outlook. "With the forces restraining the economy starting to diminish ... the outlook for economic recovery has become more promising," they said.

That upbeat assessment spurred a rally on Wall Street, with the Dow Jones industrial average closing up Wednesday by 144.62 points.

The Fed's decision left the federal funds rate, the interest that banks charge each other, unchanged at a 40-year-low of 1.75 percent.