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Archive for Wednesday, August 6, 2008

Fed holds interest rate steady

August 6, 2008

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— Confronted by problems at every turn - rising unemployment, shaky growth, credit troubles and creeping inflation - the Federal Reserve left an important interest rate unchanged, taking a gamble that for now the best move was no move at all.

The next direction for rates probably is up, but that's not likely until next year.

Fed Chairman Ben Bernanke and all but one of his central bank colleagues agreed Tuesday to leave its key rate alone at 2 percent for the second straight meeting.

In turn, the prime lending rate for millions of consumers and businesses remained at 5 percent. The prime rate applies to certain credit cards, home equity lines of credit and other lines.

"Although downside risks to growth remain, the upside risks to inflation are also of significant concern," the Fed said. Policymakers are faced with dueling problems: weak economic growth and advancing inflation. To treat one risks aggravating the other. The Fed indicated Tuesday that each problem poses about equal risks to the economy.

It was welcome news to Wall Street, however, where stocks put in their best showing in months on relief that the Fed's assessment of the economy and inflation wasn't worse. The Dow Jones industrials closed up 331.62 points at 11,615.77, its biggest one-day point gain since April 1, when it kicked off the second quarter with a nearly 400 point rally.

Many economists believe the Fed will leave rates where they are at its next meeting on Sept. 16 and through the rest of this year. This would give the fragile economy and crippled housing market more time to heal.

The Fed may start boosting rates, now at four-year lows, early next year, economists predict. Some Wall Street investors, though, haven't ruled out a rate increase later this year to fend off inflation. Either way, most agree the Fed's next move will be up. Keeping rates at low levels for too long could worsen inflation.

"The inflation fight probably will have to wait until 2009," said Lynn Reaser, chief economist at Bank of America's Investment Strategies Group. "Conditions at this point do not seem to dictate an immediate tightening."

Heightened concerns about inflation forced the Fed in June to halt a nearly yearlong series of rate reductions to shore up the wobbly economy. The campaign, which started last September, was one of the most aggressive in decades. The Fed slashed its key rate by 3.25 percentage points with the hope that lower rates would spur people and businesses to buy and invest more, energizing the economy.

A number of forces have blunted the Fed's bracing rate reductions, however. People are finding it harder to get credit to finance big-ticket purchases as banks have tightened up standards.

American consumers - even armed with the government's tax rebates of up to $600 a person - have turned more cautious. Falling home values and stock prices have eroded their net worth. On top of all that, high energy and food prices are whittling away at Americans' buying power.

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