Fed leaves benchmark rate alone

Thursday, June 26, 2008 at 1:21am
Fed Chairman Ben Bernanke reported Wednesday some improvment in consumer spending. Bloomberg News

The Federal Reserve kept its benchmark rate at 2 percent on Wednesday and warned that faster inflation may accompany some strengthening of the economy.

“Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased,” the Federal Open Market Committee said in a statement in Washington after a two-day meeting.

Fed Chairman Ben S. Bernanke and his colleagues ended the most aggressive monetary easing in two decades, refreshed their forecasts and reported some improvement in consumer spending. At the same time, crude oil prices have almost doubled in the past year and the cost of commodities from wheat to tin jumped to unprecedented levels.

“The Fed is more balanced now in their assessment,” said James Paulsen, chief investment strategist at Wells Capital Management in Minneapolis. “A rate hike is now back on the table. If it goes weak again, it can ease.”

Stocks rose yesterday after the decision, pushing the Standard & Poor’s 500 Stock Index up 0.6 percent to 1,321.97. The yield on the benchmark 10-year Treasury note rose about 1 basis point to 4.09 percent.

“The Committee expects inflation to moderate later this year and next year,” the Fed said. “However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.”

As policy makers convened, reports showed U.S. home prices fell the most on record, consumer confidence touched a 16-year low, and durable goods orders were unchanged in May.

Households are also falling further behind on their debt, eroding profits at lenders. Banks and securities firms have taken almost $400 billion in asset writedowns and credit losses.

“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.

At the same time, the statement contained no mention of the contraction in gross domestic product that many officials judged possible at their April meeting. A government report today will probably show the economy grew at a 1 percent annual pace in the first quarter, up from an initial estimate of 0.9 percent, according to a Bloomberg News survey of economists.

Dallas Fed President Richard Fisher dissented from Wednesday’s decision, preferring an increase. He dissented against the rate cut at the April meeting.

— Bloomberg News

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