WASHINGTON DC – The Federal Reserve, on Tuesday held overnight interest rates charged its largest customers – primarily banks – at 2 percent, while indicating it had continued worries about weaker economic growth ahead.
In a statement accompanying its decision, the Fed sought to straddle the line between continuing inflation concerns and the risk of weaker growth. “Although downside risks to growth remain, the upside risks to inflation are also of significant concern,” the Fed said in a Wall Street Journal report.
The language underscored Fed officials’ continued uncertainty about the economy’s course, indicating a rate increase is far from imminent.
With oil prices falling in recent weeks, the Fed noted that high inflation has been “spurred by the earlier increases” in the prices of energy and other commodities. It maintained its view from the June meeting that it expects inflation to moderate “later this year and next year, but the inflation outlook remains highly uncertain.”
At the same time, the Fed removed language from June indicating that the risks of weaker growth “appear to have diminished somewhat.” On Tuesday, the Fed maintained its concerns that growth would come under pressure in the months ahead with softening labor markets and financial markets “under considerable stress.”
“Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters,” the Fed said. “Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.”
The vote was 10-1. Federal Reserve Bank of Dallas President Richard Fisher cast his fifth dissent of the year, preferring a rate increase. Voting with the majority was Elizabeth Duke, a former community banker who was sworn in Tuesday morning as a Fed governor.
The Fed’s latest decision is based in large part on the continuing credit crisis, which started last August and now is threatening to exact a deeper toll on the economy. The Fed cut interest rates aggressively over the past year — from 5.25% last September — and launched numerous direct-loan programs for financial institutions to offset the credit strains. But the moves have only partially improved conditions in key lending markets.
Rates for a 30-year fixed mortgage, for instance, are higher than they were a year ago as banks tighten their standards and mortgage giants Fannie Mae and Freddie Mac struggle through market turmoil. The higher costs and decline in mortgage availability are threatening to exacerbate the housing downturn. Tumbling home values could restrain consumer spending even further.
At the same time, banks are facing steep losses from mortgages. Their weaker state means those institutions will have less capital to lend to consumers and businesses to help them out of the economic slowdown.
a>>
