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Archive for Wednesday, August 8, 2007

No Fed rate cut despite turmoil

August 8, 2007

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— The Federal Reserve on Tuesday left interest rates unchanged but suggested for the first time that turmoil in financial markets, a widening credit crunch and the continuing housing downturn could slow an already slowing economy.

But analysts said the Fed set the stage for a possible change of course in the months ahead if a credit crunch and continuing upheavals in financial markets threatened to hurt the overall economy.

For the past three years, the central bank, focused on keeping inflation in check, had raised its benchmark short-term interest rate and, for the past 13 months, kept it there. Though few market players expected the Fed to try to offset the current turmoil by lowering its key rate Tuesday, some had hoped that policymakers at least would signal that they were preparing for such a step.

Instead, the bank took official notice of the problems and said, in effect, that it would pause and consider whether its focus on avoiding inflation needed to change.

"The balance of risks is shifting," said Richard Berner, chief U.S. economist with Morgan Stanley in New York. "But it hasn't shifted to the point where the Fed feels it has to act, or even change its rhetoric."

In its statement announcing the decision, the Fed said: "Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing.

"Nevertheless," it said, "the economy seems likely to continue to expand at a moderate pace over the coming quarters, supported by solid growth in employment and a robust global economy."

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