Fed leaves rates steady at 2% despite financial turmoil and easing inflation

With the latest financial sector turmoil and easing inflation, many economists were at least thinking the Federal Reserve would reduce interest rates on Tuesday. That was not the case. The Fed left the benchmark federal funds rate stead at 2 %, where it’s been since April and for the third straight meeting.

The vote was unanimous, without even a dissent from Dallas Fed President Richard Fisher, who voted to increase rates during two prior Fed meetings.

A MarketWatch article by Greg Robb aptly opened with the the likely intent on the move:

"[The fed is] trying to project an appearance of calm and stability amid the turmoil of financial markets."

The Federal Open Market Committee (FOMC) statement reflects continual concern over economic growth and the direction of inflation despite the latter showing a slight easing according to a report today by the a Labor Department.

The FOMC text statement follows in its entirety:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Ms. Cumming voted as the alternate for Timothy F. Geithner.

Immediately following the news, U.S. stocks plunged further downward. They have since recovered on reports the government might extend a loan to embattled insurer American International Group Inc.

One thought on “Fed leaves rates steady at 2% despite financial turmoil and easing inflation”

Leave a Reply