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Federal Reserve Leaves Rates Unchanged; Wall Street Pleased

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By MARTIN CRUTSINGER

The Associated Press

Published: August 6, 2008

WASHINGTON - 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.
Private economists said they viewed the Fed's brief announcement as a strong signal that the central bank could remain on hold until after the November presidential election, even though there was again a dissent from one Fed official who argued that rate hikes were needed now to fight inflation.

"I think the Fed would rather wait until after the election before they consider raising rates," said David Jones, chief economist at DMJ Advisors. Jones predicted the central bank will likely leave rates alone at its next two meetings in September and October and make the first rate increase at the final meeting of the year in December.

The Fed is caught between what many economists believe is a recession and rising inflation pressures, triggered by this year's huge run-up in energy prices.

The statement said that "tight credit conditions, the ongoing housing contraction and elevated energy prices are likely to weigh on economic growth over the next few quarters."

The central bank also said it believes that "over time" the significant rate cuts it has already put in place plus the sizable operations to supply additional money to financial institutions should help to promote a return to "moderate economic growth."

On inflation, the Fed said it expected a moderation in price pressures later this year and next year but cautioned that "the inflation outlook remains highly uncertain."

The Fed also left rates unchanged at its last meeting on June 24-25, a decision that marked the end of the Fed's most aggressive period of rate cuts in more than two decades. Those reductions were engineered to protect the economy from turmoil in financial markets caused by billions of dollars of losses on home mortgages.

Many economists believe the Fed will leave the funds rate at 2 percent for the rest of this year. The hope is that recent declines in oil prices will be sustained and take pressure off inflation.

Oil prices dropped as low as $118 per barrel, the cheapest they've been since early May. Crude has now fallen more than $25 since reaching a trading high of $147.27 on July 11.

Last week, the Labor Department reported that the nation's unemployment rate jumped to 5.7 percent in July as businesses laid off workers for the seventh straight month, a string that normally signals the start of a recession.

Those layoffs and the fragile state of the financial sector would normally keep the Fed from raising interest rates. Some Fed officials have been arguing, however, that the central bank runs the risk of losing its inflation-fighting credibility if it delays fighting growing inflation problems.

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