DJ Fed Leaves Fed Funds Rate At 2%;Inflation 'Significant' Worry
Date: 08/05/2008 13:14
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--A mostly united Federal Reserve on Tuesday held interest rates steady but suggested inflation worries remain a top concern.
Still, with growth risks lingering officials are unlikely to raise rates until the end of the year at the earliest.
The Federal Open Market Committee voted 10-1 to hold the target federal funds rate for interbank lending unchanged at 2% for a second-straight meeting. It had lowered the rate 3.25 percentage points between September and April to limit the fallout from the housing and credit crunch.
Officials also took no action Tuesday on the discount rate charged for direct loans to banks, which stands at 2.25%.
Dallas Fed Richard Fisher dissented for a fifth-straight time, in favor of higher rates. But for a second-straight meeting his was the only dissent. That suggests officials are mostly united in taking a cautious approach to policy.
Tuesday's meeting was the first for new Fed Governor Elizabeth Duke, who was sworn in on Tuesday and voted with the majority. The Washington, D.C.-based Board of Governors almost always votes in lockstep with the chairman.
"Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee," the Fed said.
That's a shift from their last policy statement June 25, when officials signaled that higher inflation matched, or even exceeded, weak growth as their top concern. "Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased," the Fed said in June.
Though the economy managed to grow 1.9% at an annual rate in the second quarter, the second-half outlook has deteriorated.
The U.S. lost jobs for a seventh-straight month in July, the government said Friday, pushing the unemployment rate to a four-year high of 5.7%. That's already at the top of the 5.5% to 5.7% range the Fed expects at the end of 2008, suggesting the speed of joblessness has caught officials by surprise.
Consumer spending, which makes up about two-thirds of gross domestic product, has also weakened, especially for big-ticket items like automobiles.
"Labor markets have softened further and financial markets remain under considerable stress," the Fed said.
And while inflation numbers since the June FOMC meeting signaled a big jump - the second-highest monthly readings since the early 1980s as measured by the consumer price index and the price index for personal consumption expenditures, the Fed's preferred gauge - the outlook has actually improved somewhat.
Oil prices fell about $15 per barrel between the June and August FOMC meetings and inflation expectations stabilized or even fell according to some measures. And the rise in joblessness suggests enough slack is emerging to hold labor costs down, preventing the kind of wage-price spiral that plagued policymakers in the 1970s and 1980s.
Inflation has been "high" and "the inflation outlook remains highly uncertain," the Fed said.
Though futures markets price in higher rates by the end of the year, Fed watchers have increasingly concluded that a tightening cycle isn't likely until next year. The next two FOMC meetings, in September and October, come during the heat of the presidential election.
And the Fed's decision last week to extend loans to investment banks through January 2009 - beyond the original September deadline - would also complicate any attempt to raise rates before the end of the year.
-By Brian Blackstone and Maya Jackson Randall; Dow Jones Newswires; 202-828-3397; brian.blackstone@dowjones.com and maya.jackson-randall@dowjones.com
(Tom Barkley and Meena Thiruvengadam contributed to this article)
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DJ Text Of Federal Reserve's Interest Rate Decision
08/05/08 13:13
NEW YORK (Dow Jones)--The following is the text of the Federal Reserve's decision on interest rates released Tuesday, Aug. 5:
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2%.
Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress. 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. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.
Inflation has been high, spurred by earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.
Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote substantial economic growth and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke; Chairman; Timothy F. Geithner; Vice Chairman; Elizabeth A. Duke; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.
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