``The probability of an unwelcome fall in inflation has diminished and now appears roughly equal to a rise in inflation,'' the Federal Open Market Committee said in a statement. The FOMC voted 12-0 to leave the overnight bank lending rate at 1 percent, the lowest level since 1958.

Investors had been split about whether the Fed would drop the ``considerable period'' phrase after the economy grew last quarter at the fastest rate in 19 years. By keeping the language and tweaking its stance on disinflation, economists said the central bank may be setting the stage for a move sometime after Chairman Alan Greenspan speaks to Congress early next year.

``We view this statement as the start of Fed groundwork for a spring rate hike,'' said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

The price of the benchmark 10-year Treasury fell after the announcement, as traders interpreted the remark to mean the central bank is closer to raising its target interest rate than they anticipated. The note due in November 2013 fell 5/8 point, pushing its yield up 8 basis points to 4.35 percent at 2:48 p.m.

The FOMC dropped an earlier phrase calling disinflation a ``predominant concern for the foreseeable future.'' Still, ``with inflation quite low and resources slack, the committee believes that policy accommodation can be maintained for a considerable period.''

Forecasts

The decision was expected by all 82 economists in a Bloomberg survey. The FOMC has included the ``considerable period'' language in every statement since August. About half the 22 primary dealers in U.S. government debt predicted the central bankers would omit the language, in a Bloomberg survey last week.

``The evidence accumulated over the intermeeting period confirms that output is expanding briskly and the labor market appears to be improving modestly, the statement said. ``Increases in core prices are muted and expected to remain low.''

The changes represent ``very clever wordsmithing on the part of the people at the FOMC,'' said Neil Soss, chief economist at Credit Suisse First Boston, in a television interview with Bloomberg News. ``They left that language there but at the same time they changed its content.''

The U.S. economy expanded at an 8.2 percent annual rate in the third quarter, the fastest quarter of growth since 1984, during President Ronald Reagan's first term. Still, the core personal consumption expenditures index, the Fed's preferred inflation indicator, rose just 1.2 percent for the 12 months ending October.

Rate Expectations

``The Fed will remain on hold at least until the middle of 2004, and probably somewhat longer,'' said Lou Crandall, Wrightson ICAP LLC's chief U.S. economist, in a note to clients Monday. Fed officials ``intend to be more patient in responding to this economic recovery than they have been in past cycles.''

While low inflation is the FOMC's goal, members have been concerned that prices might fall too far, touching off a decline in general prices, or deflation. That would push down income and earnings, meaning spending would drop as consumers and companies use more of what they earn to pay fixed debt obligations.

``This is the first expansion in 40 years that began with a very low inflation rate,'' San Francisco Fed president Robert Parry, a voting member of the FOMC, told the Portland Rotary Club on Nov. 25. ``So the response of monetary policy isn't necessarily going to be typical either.''

Traders have shifted expectations of how soon the Fed would raise interest rates over the past nine days. Yields on March Eurodollar futures have fallen to about 1.3 percent from 1.4 percent on Dec. 1.

Growth and Jobs

The level suggests traders expect the Fed to wait until the second half of 2004 to raise its target rate. Eurodollar futures are indications of three-month lending rates that have averaged 24 basis points more than the Fed's target over the past 10 years.

Asked in a televised interview with Bloomberg when he thinks the Fed might next raise its key rate, former Fed Vice Chairman Alan Blinder said, ``May at the earliest, and it could well be later than that.''

The economy may expand at a 4.4 percent rate in 2004, up from 3.1 percent this year, based on median forecasts in the latest Bloomberg survey.

Growth of 4 percent next year is ``very achievable,'' Gregory Mankiw, the chairman of President George W. Bush's Council of Economic Advisers, said in a televised interview with Bloomberg. Bush won tax cuts from Congress earlier this year to spur job growth. More than 2.6 million manufacturing jobs have been lost since Bush took office in January 2001.

One catalyst for the decline in money market yields was the November employment report that showed the economy created just 57,000 jobs, below the 150,000 economists had forecast. The report contained some positive signs: average weekly hours worked rose to 33.9 from 33.8, and temporary hires, which can be an indicator of permanent hiring trends, totaled 21,000, up from 15,000 the previous month.

Fed officials have said the jobless rate, which fell to 5.9 percent in November after spending seven months at 6 percent or higher, is above the level they consider full employment that might start to boost inflation.

Productivity

Productivity growth and business caution are still suppressing job creation, economists said. Output per hour of work, or productivity, averaged 5.6 percent annualized growth over the past eight quarters, more than double the 2.5 annual average rate of 1996-2000. The manufacturing sector is driving most of the productivity gains, and factories continue to whittle away jobs even as they expand activity. Factory jobs fell for the 40th consecutive month in November.

``Excess capacity and intense competition and lower prices of imports have meant that companies have had to cost cut their way back to profitability,'' Allan Gilmour, vice chairman of Ford Motor Co., told the Detroit Economic Club yesterday. ``As a result, manufacturing jobs are still down by more than three million since the end of the 1990s.''

Fed officials continue to address the gap between available resources and the use rates of labor, factories and services.

``Although the economy now appears to have turned the corner, much additional progress needs to be made before our country's labor and capital resources are fully utilized,'' Federal Reserve Board Vice Chairman Roger Ferguson said Nov. 21.

The Fed last reduced the federal funds rate on June 25, the 13th rate cut since January 2001, when the central bank began its cycle of lower rates to try and head off a collapse in business spending that led to a recession between March and November that year.

Also today, the Fed left the primary credit discount rate on loans to banks from the Fed system unchanged at 2 percent.

In recent years, the central bank has kept the discount rate within a half point of the overnight bank rate. On January 9, the Fed changed the cost of discount window loans. So-called primary credit, the loan rate for healthy banks, is now set at 1 percentage point above the fed funds rate, and secondary credit, a rate for distressed banks, trades at 1.5 percentage points over the overnight rate.