Fed leaves interest rates unchanged
Fed leaves interest rates unchanged

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.

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.

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.

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.

To help, Democrats want a second stimulus package; the Bush administration, though, has been cool to what's been floated.

Bernanke's predecessor, Alan Greenspan called the current credit crisis a "once or twice a century event.” Given the severity of the financial problems, the surprise is not that economic growth is slowing but that there is any growth at all, Greenspan wrote in an opinion piece in the Financial Times.

One Fed member — Richard Fisher, president of the Federal Reserve Bank of Dallas, — wanted to raise rates Tuesday. Fisher, who has a reputation for being extra vigilant on inflation, was the sole opposition vote. It was the fifth time this year that he dissented.

New Fed board member Elizabeth Duke, who was sworn in before the meeting, voted with the majority.

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