Fed Leaves Key Interest Rate Unchanged

Aug 08 2:20 PM US/Eastern

By MARTIN CRUTSINGER
AP Economics Writer


WASHINGTON


The Federal Reserve on Tuesday left a key interest rate unchanged, marking at least a temporary pause in what had been the longest unbroken stretch of Fed rate increases in recent history.

The Fed's rate-setting committee voted 9 to 1 to leave the federal funds rate, the interest banks charge on overnight loans, at 5.25 percent. It was the first time the Fed had met and not raised rates in more than two years

However, the relief for millions of business and consumer borrowers could be only temporary. The central bank said that "some inflation risks remains," holding out the possibility that it could resume raising rates at future meetings.

The Fed decision means that banks' prime lending rate, the benchmark for various consumer and business loans, will remain at 8.25 percent. Before the Fed started raising rates in June 2004, the prime had been at 4 percent, its lowest point since 1958.

In 17 consecutive meetings stretching from June 2004 through June the Fed boosted the funds rate from a 46-year low of 1 percent to the current 5.25 percent, all in an effort to slow the economy enough to keep inflation under control.

The Fed's decision to finally pause had been widely anticipated given the signs of a spreading economic slowdown, in part reflecting the impact of the Fed's long string of rate hikes.

Overall economic growth slowed in the spring to a rate of just 2.5 percent, less than half the pace of the first three months of the year, and on Friday the government reported that the unemployment rate in July rose from 4.6 percent to 4.8 percent.

u can See the link
http://www.breitbart.com/news/2006/08/08/D8JCDBMG0.html

Dow down 23 , Nasdaq down 6 ... fed has paused but why such a reaction from the market???

ya don't know why dow dwn. I think bec. of crude oil 77$ also may be some local bad news.

Dow: -40pt.

My Advice: Don't blindly start buying.

Fed hits pause button on rate hikes
WASHINGTON (XFN-ASIA) - 0808bFedInterestRates
The Federal Reserve, after engineering the longest unbroken string of
interest rate hikes in recent history, has finally hit the pause button.
The big question now is whether the reprieve for millions of borrowers
will be temporary or a permanent halt in the central bank's campaign to slow
the economy as a way of keeping inflation from getting out of hand.
At its meeting Tuesday, the Fed announced it was leaving the federal
funds rate unchanged at 5.25 percent, marking the first time it has skipped
raising rates since it began a two-year credit tightening drive in June 2004.
The funds rate, which was at a 46-year low of 1 percent at the start of
the campaign, is now at the highest level in more than five years.
The Fed's stand-pat action means that commercial banks' prime lending
rate, the benchmark for millions of consumer and business loans, will remain
at 8.25 percent.
Tuesday's decision to pause came on a 9-1 vote of the Fed's interest-rate
setting panel, with Jeffrey Lacker, president of the Fed's Richmond, Va.,
regional bank, dissenting.
It marked the first time since Fed Chairman Ben Bernanke took over from
Alan Greenspan in February that a rate decision by the Federal Open Market
Committee has not been unanimous.
The dissent gave a hint of the debate inside the committee between
officials who feel the Fed's 17 consecutive rate increases will be enough to
contain inflation and an opposing camp that points to worrisome signs of
rising inflation in arguing that more rate hikes are needed.
Many private economists are betting that the Fed will raise rates one
more time, probably at the next meeting on Sept. 20, pointing to language in
the brief announcement that expressed worries that rising energy costs and
tight labor markets posed a risk of higher inflation down the road.
"They are telling us they are pausing, but they are not promising to stay
paused," said David Wyss, chief economist at Standard & Poor's in New York.
But other economists were not so sure about further rate increases. They
noted elements in the statement that seemed to take an optimistic view that
inflation would settle down, despite this week's worrisome jump in crude oil
prices.
"Inflation pressures seem likely to moderate over time," the Fed stated,
citing subdued inflation expectations and the fact that its earlier interest
rate increases have not been fully absorbed by the economy.
Wall Street, where investors long have hoped for a pause by the Fed,
posted a moderate decline on the news Tuesday, with the Dow Jones industrial
average falling 45.79 points.
Some analysts said investors may be worried about the possibility of one
or two more rate boosts, fearing that the central bank is close to overdoing
the credit tightening and could run the risk of triggering a recession next
year.
"A further rate increase at a time when 85 percent of the economy is
slowing is just too dangerous," said Bernard Baumohl, executive director of
the Economic Outlook Group.
U.S. industry also expressed relief with the Fed's decision.
"With sky-high energy prices already increasing the cost of doing
business, the last thing manufacturers need is another interest rate hike,"
said David Huether, chief economist for the National Association of
Manufacturers.
Already, the government has reported that overall economic growth slowed
to a 2.5 percent annual rate in the spring, less than half the first quarter
pace, and that job growth was anemic for the fourth straight month. The
unemployment rate rose to 4.8 percent.
Bernanke, who raised hopes of a rate pause with his July congressional
testimony, is counting on the economy to slow enough to bring inflation down
to more acceptable levels.
That scenario could prove too optimistic, especially with soaring energy
prices beginning to spill over into areas outside of energy.
The Fed dropped out a section of past statements which said strong
productivity growth was keeping labor costs under control, apparently in
recognition of a government report earlier in the day that showed
productivity slowed dramatically in the spring and unit labor costs rose at
the fastest pace since late 2004.
But many economists believe the Fed's basic forecast of slower growth,
but no recession, and lower inflation rates has a good chance of coming true.
Mark Zandi, chief economist at Moody's Economy.com, said he believed the
Fed will not need to raise rates again and by this time next year the Fed
will start cutting rates because inflation will have slowed to acceptable
levels.
"The Fed has tightened aggressively for two years and now they want to
stop and assess the impact of those moves," he said.