Fed Decides to Hold Rates Steady: A Round-Up of Reactions

Yesterday the Federal Reserve announced it would leave overnight interest rates at 5.25% despite recent volatility in the financial markets and concerns over the tightening of credit.

The Real Time Economics blog from the Wall Street Journal offers a round-up of expert commentary on the decision.

Zoltan Pozsar, writing for Moody's Economy.com, likens Fed Chief Ben Bernanke to Ulysses, lashed to the mast to resist the tempting but fatal calls of the sirens, with the financial markets cast as the sirens. Bernanke's steadfast piloting is applauded by Pozsar who says, "economic data and credit events to date do not warrant rate cuts" as of yet.

Janney Montgomery Scott LLC and Richard F. Moody of Mission Residential both note that this decision continues the Fed's slow move toward policy neutrality that has been underway for several months. Moody, however, comments: "I can leave my office and take a step towards China, but that still leaves me with quite a journey, and the FOMC still has a way to go to reach neutrality."

Morgan Stanley Research's David Greenlaw says the Fed's decision to hold steady may signal that "we are still in the midst of a needed repricing of risk, as opposed to an outright credit crunch," and goes on to agree with the Fed "that the direct economic loss associated with the subprime problem is relatively modest." Despite the fact that the current crisis could hurt some players in the credit market, the Fed has wagered that riding to the rescue with a rate cut might "risk reinflating the credit bubble."

As for the reaction of the markets, the NY Times reports:

Traders had difficulty sorting out the Fed's message and by the end of the day still seemed convinced that the Fed was keeping the door open to a rate cut later this year. After falling sharply minutes after the statement was released around 2:15 p.m., stocks later rebounded, finishing trading modestly higher... In the futures market, the odds of a rate cut by the end of this year were reduced somewhat but still remained greater than even.