US Fed holds key interest rate steady at 2%

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(Agencies)
Updated: 2008-06-26 09:51

WASHINGTON - With inflation moving higher on its worry list, the Federal Reserve held interest rates steady Wednesday, ending nearly a year of cuts to bolster the economy, and hinted that the next direction for rates could be up.

In this April 3, 2008 file photo, Federal Reserve Chairman Ben Bernanke testifies on Capitol Hill in Washington. [Agencies]

Fed Chairman Ben Bernanke and all but one of his central bank colleagues agreed that the best course was to leave a key rate alone at 2 percent, as the country slogs through the crosscurrents of plodding economic growth and zooming energy and food prices that threaten to spread inflation.

That meant the prime lending rate for millions of consumers and businesses stayed at 5 percent. The prime rate applies to certain credit cards, home equity lines of credit and other loans.

The decision brought to a close a powerful series of rate reductions that started in September and extended through late April. It was the central bank's most aggressive intervention in two decades to shore up an economy bruised by the trio of housing, credit and financial crises.

On Wall Street, stocks ended with a modest gain. The Dow Jones industrial average closed up 4.40 points to 11,811.83. Broader stock indicators managed to log stronger gains than the blue chips.

The Fed said it believes its rate cuts will "promote moderate growth over time" as they work their way through the economy. It also said risks that economic growth will falter appear to have "diminished somewhat."

At the same time, the Fed expressed heightened concern about inflation.

"Upside risks to inflation and inflation expectations have increased," the Fed said. Inflation eats into paychecks, corporate profits and erodes the value of investments. It is hard to control once it gets out of hand.

Some Wall Street investors and economists think the Fed, to fend off inflation, might be forced to start boosting rates as early as its next meeting on Aug. 5 or toward the end of this year - possibly at the Dec. 16 meeting.

Others, however, think that's a situation the Fed would like to avoid - especially given that the housing market is stuck in a deep slump, foreclosures are at record highs and jobs are harder to find. Raising rates too soon could hurt housing and deal a setback to the national economy. Those analysts believe the Fed won't start to push up rates until next year.

The Fed didn't signal that a rate increase was imminent, instead leaving the timing open.

However one member - Richard Fisher, president of the Federal Reserve Bank of Dallas, wanted to increase rates at Wednesday's meeting. Fisher, who has a reputation for being extra vigilant on inflation, was the sole dissenter.

"The needle is shifting more to greater concerns over inflation as opposed to economic growth," said Lynn Reaser, chief economist at Bank of America's Investment Strategies Group. "That means the Fed's next move in interest rates will be up but the Fed left its options open with respect to timing."

Although Fed policymakers believed the economy would eventually gain some traction, they acknowledged that conditions are delicate and the economy is not out of the woods yet.

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