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Archive for Wednesday, September 17, 2008

Fed holds key rate steady

September 17, 2008

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— Showing a tough love stance for now, Federal Reserve Chairman Ben Bernanke and his colleagues decided to keep a key interest rate steady Tuesday. They acknowledged stresses in financial markets have grown, though, and hinted they stood ready to lower rates if needed.

Wreckage on Wall Street in recent days did not force the Fed - as some thought possible - to reverse course and cut rates. The Fed left its key rate at 2 percent for the third straight meeting. It marked the first meeting this year the Federal Open Market Committee, which sets interest rate policy, agreed unanimously with a decision.

The prime lending rate for millions of consumers and businesses stayed at 5 percent. The prime rate applies to certain credit cards, home equity lines of credit and other loans. The Fed's key rate and the prime rate are at four-year lows.

The Fed's view of economic and financial conditions, however, was more dour than its last assessment in early August. Economic growth appears to be slowing as consumers hunker down and export growth cools off a bit, Fed policymakers said. And, "strains in financial markets have increased significantly," the Fed said.

The more bearish tone indicates the Fed is again open to rate cuts down the road, some analysts believe.

"The Fed has opened the door to a rate cut that many thought was closed," said Stuart Hoffman, chief economist at PNC Financial Services Group. "I think there was more emphasis about the economy being weak."

The Fed said it would "act as needed."

In recent days, the American financial system has suffered its worst shakeout since the Great Depression as bad bets on dodgy mortgage-backed securities claimed more Wall Street giants. Wall Street on Monday plunged 500 points, the most since the September 2001 terror attacks.

On Tuesday, the Dow Jones industrials gained 141 points after the Fed's action soothed market anxiety over the financial system.

Urgently trying to keep cash flowing amid a Wall Street meltdown, the Fed pumped another $70 billion into the nation's financial system to help ease credit stresses. In emergency sessions over the weekend, the Fed expanded its loan programs to Wall Street firms, part of an ongoing effort to get credit flowing more freely.

By standing pat now, the Fed is leaving room in its rate-cutting arsenal to act later, if needed. "The Fed has kept its powder dry," said Terry Connelly, dean of Golden Gate University's Ageno School of Business.

Over the last few months, Bernanke and his Fed colleagues have signaled that the central bank's next move on interest rates would probably be an increase to fend off inflation. Given all the economic and financial problems, though, economists are now saying the likelihood of a rate increase over the next six to nine months has all but disappeared.

Inflation - which has been high - should moderate later this year and next year, the Fed said. It dropped language contained in its August assessment that some barometers of consumer and business expectations of inflation have been "elevated." That suggested slightly less concern about inflation even as the Fed made clear it would remain vigilant on this front.

Fallout from the crisis is prompting Democrats to call for a second round of government stimulus, something Republicans and President Bush so far has resisted. And, on the campaign trail, both presidential GOP nominee Sen. John McCain and his Democratic rival, Sen. Barack Obama, said the cascading crisis underscores the need to overhaul the nation's regulatory structure, which dates back to the Civil War.

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