Fed Leaves Interest Rates Unchanged

Concerns About Inflation Top Concerns About Financial Markets

(CBS/AP)  The Federal Reserve left a key interest rate unchanged on Tuesday as worries about inflation trumped concerns about turbulent financial markets.

Fed Chairman Ben Bernanke and his colleagues voted unanimously to keep their target for the federal funds rate — the interest that banks charge each other — at 5.25 percent, where it has been for more than a year.

The Fed decision came after a volatile couple of weeks on Wall Street as investors have been beset by troubles in global credit markets stemming from a sharp rise in defaults on subprime mortgages.

One broker tells CBS News correspondent Kelly Wallace that it's tougher to get a mortgage now than at any time during her 29 years in business.

"I'm seeing customers that I could have helped in the past unable to get loans," says Pava Leyrer, president of National Heritage Mortgage.

It's not just the middle class feeling the credit squeeze, reports Wallace. Mortgages for upper-income buyers are also more expensive, while some mortgage businesses are going under.

In a brief statement, the Fed acknowledged the turbulence and said the downside risks to the economy had "increased somewhat."

But the Fed continued to state that the predominant risk remained that inflation "will fail to moderate as expected."

Many analysts believe the Fed will remain on hold through the rest of this year, preferring to watch and make sure that inflation moderates back to an acceptable level.

The Fed's decision initially disappointed Wall Street, as the Dow Jones industrial average plunged by 90 points in the first half hour of trading after the midafternoon announcement. However, after closer inspection, investors took heart at the Fed's acknowledgment of the credit troubles, and they pushed the Dow back into positive territory.

Mark Zandi, chief economist at Economy.com, said Fed officials were "signaling that events in financial markets are of concern ... that the risks to the economy have increased."

Tuesday marked the ninth consecutive meeting in which the Fed has left its key policy lever unchanged. The last rate move was a quarter-point increase, the 17th in a row, on June 29, 2006. That capped a two-year campaign that pushed the funds rate from a 46-year low of 1 percent to its current level in a bid to slow the economy enough to keep inflation under control.

The decision to leave rates unchanged means that banks' prime lending rate, the benchmark for millions of consumer and business loans, will remain at 8.25 percent, where it has been for the past year.

As it did at its June meeting, the central bank said the readings on core inflation have improved modestly in recent months.

A key inflation gauge watched closely by the Fed — which excludes food and energy — was up 1.9 percent over the 12 months ending in June, putting it back within what is widely perceived as the Fed's comfort zone of 1 percent to 2 percent.

On the overall economy, the Fed noted the recent problems.

"Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing," the statement said.

But with all of these problems, the Fed repeated its belief from past statements that "the economy seems likely to continue to expand at a moderate pace over coming quarters." The statement said the U.S. economy would be supported by solid growth in employment and a "robust global economy."

The overall economy, after having slowed to a barely discernible growth rate of 0.6 percent in the first three months of this year, grew at a solid annual rate of 3.4 percent in the April-June period even though the slumping housing market continued to subtract from growth.

Economists expect continued troubles in housing and spreading problems with subprime mortgages and other loans acting to slow growth to a more moderate pace of around 2.5 percent in the final half of this year.

Growth at that pace would not be fast enough to keep the unemployment rate from rising. The government announced last week that the jobless rate in June rose to 4.6 percent, the highest level in six months, and many economists believe it will end the year at around 5 percent. That would still be relatively low by historical standards.

[sjc_1]

Ben is kind of stuck. The kind of inflation he is talking about may not be the kind that people think of. It is not a matter of the money supply, which has been fairly constant. It is the effect of all the debt the government and individuals have taken on.

If they lower the rates, it could lead to even more speculation like that seen during the years that the Fed kept the rates low. Greenspan kept that rates very low, even after we were out of the last recession. You are seeing the effects of that now.

[gaye5]

hat the Federal Reserve bank had of left the interest rates the same here in Australia, and already the left wing are out blaming our Mr Howard for the rise.. They are fools as when they were in government 12 years ago it was up to the 15% and our right wing has kept is down to the 6%, and if our states which are all left wing, hadn't done a spending spree on nothing, then they had to go out and borrowed money when we are in the best time economically, we wouldn't have had to borrow..
But our right winged government has in the 12 years that they have been in government have paid off the 96 Billion in overseas dept that Labor incured, and for Australia with a small population that is horrendous amount..
Mr Howard has 4 billion in the black at the same time even though we have had the worst drought ever, we have sent our men to Iraq, we have sent millions to earth quake zones, and tsunami and many other places, we have had the Asian melt down and still we are doing well, all thanks to our Mr Howard, and now our left are tying to tell the people that he is tooo old for the job, so New Zealand want him there to fix up NZ..

[tylenol6]

Bush and his buddy Bernanke want the American people
to lose their houses. This is what this is all about. Take more from the middle class.We are on
our way to becoming a third world country while the
rich gets RICHER.....

[DayNovo]

Nine times in a row now that the Fed rate has stayed unchanged. Will Bernanke ever move the dial?
For more analysis click here:
http://sneakybusiness.typepad.com/sneaky/2007/08/fed-leaves-rate.html

[feelfree1]

This private banker piece of ***, Ben Bernanke, has left interest rates unchanged for the last 6 sessions. How much does this greedy ****** get paid to do nothing?

Why have they remained unchanged? If he raises them, the collapse of the housing-bubble will accelerate. If he lowers rates, inflation will accelerate.

What we are left with, is the very real possibility of "stag-flation"; a contracting economy, with higher prices.

Re: "When will ExxonMobil's record profits pay the freight for their war?
Posted by sanevoice"

Excellent question. Their assets, along with those of other war-profiteers, should be seized and liquidated to help pay the costs.

[bwessels]

I wonder what it would take to get these current recalcitrant executive branch politicians to do the right thing and properly regulate and tax the out-of-control profiteers in the energy sector. The presidential power holders (Oil-Trust-Fund Baby Bush and Halliburton Cheney in particular) are deeply in bed with these manipulators.

As the middle class suffers for their capital gains (taxed at only 15%, thank you very much), they might even launch a war in the middle east, paid for by the lives and taxes of the middle and lower classes, to create doubt, fuel energy commodity speculation (pun intended) and artificially raise prices.

When will ExxonMobil's record profits pay the freight for their war?

[vastr-wcon]

As a number of reports have shown, the current "turmoil" in the markets is directly related to market manipulation by hedge funds. Congress is continuing its failure to regulate these rogue groups - and a number of presidential candidates (Conniving Calculating Clinton, in particular) are deeply in bed with these manipulators. Regretfully, it will take a major financial catastrophe caused by the hedge funds to get these recalcitrant politicians to do the right thing and properly regulate and tax these out-of-control organizations.