Fed Leaves Rates Unchanged

By BRIAN BLACKSTONE and MAYA JACKSON RANDALL

WASHINGTON — The Federal Reserve on Tuesday held interest rates steady and in a disappointment to Wall Street didn’t appear to signal that rate cuts are forthcoming anytime soon.Though officials continued to warn about inflation risks, they also signaled that economic concerns have intensified in the wake of the collapse of Lehman Brothers Holdings Inc. and a steep selloff in equity markets Monday.

“The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee,” the Fed said in a statement.  (Read the full statement).

The Federal Open Market Committee voted unanimously to keep the target fed funds rate for interbank lending unchanged at 2% for a third-straight meeting. The Fed took no action on the discount rate for loans to brokers and commercial banks, which stands at 2.25%.
It was the first unanimous interest rate decision in one year. Dallas Fed President Richard Fisher, who had dissented in favor of higher rates the previous five meetings going back to January, voted with the majority this time.

That doesn’t mean the Fed’s inflation worries have evaporated despite good news in August, and a rate cut is by no means assured even if financial conditions worsen.
Still, Tuesday’s decision marks a reversal in the interest rate outlook. As recently as a couple of weeks ago, financial markets were betting that the next move would be toward higher rates in late 2008 or early 2009, a scenario encouraged by Fed officials in remarks and meeting minutes.

But that was before the housing and credit crisis claimed new victims including Lehman, which filed for the largest bankruptcy in U.S. history; Merrill Lynch & Co., which agreed to be bought by Bank of America Corp.; and mortgage giants Fannie Mae and Freddie Mac, which were taken over by the government earlier this month.
In the wake of the Lehman collapse, the Dow Jones Industrial Average shed more than 500 points Monday, its biggest point decline since just after the Sept. 11 attacks.

That again raised the specter of what Fed officials call an adverse feedback loop — when credit market strains weaken the economy which then in turn puts even more pressure on markets in a downward spiral.

Aiming to head that off, the Fed in a late Sunday announcement expanded its liquidity tools, agreeing to accept corporate equities as collateral at the discount window for investment banks to ease credit market strains.
Some economists had expected the Fed to follow that up with a rate cut Tuesday, as it did in the days following the Bear Stearns collapse six months ago.

But conditions have changed since then. For one, the fed funds rate is already at a very low level and a further cut might not have done much good to the economy. And by standing pat the Fed sends another signal that officials want Wall Street to heal itself without too much government involvement.

Still, the economic outlook has worsened considerably in the past few weeks. The unemployment rate rose to a five-year high last month as companies shed jobs for an eighth-straight month. Meanwhile consumers have pulled back spending while the key sector keeping the economy from contracting so far this year — exports — is likely to soften as the U.S. slowdown spreads to other countries.
Tight credit, the housing slump and “some slowing” in exports “are likely to weigh on economic growth,” the Fed said.

In contrast, inflation has improved since August, albeit from very high rates of growth. The consumer price index fell last month for the first time in almost two years, the government said Tuesday, led by declines in energy, automobiles and housing.

Inflation should moderate further in September as the slide in oil prices intensifies — oil prices are more than $50 below their July peak — and the weak economy takes pressure off labor costs.
“The Committee expects inflation to moderate,” the Fed said, but the outlook “remains highly uncertain.”

Advertisements

2 thoughts on “Fed Leaves Rates Unchanged

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s