WASHINGTON: The Federal Reserve held US interest rate steady yesterday, opting to soothe rattled financial markets with central bank lending and saying it was worried both about economic weakness and price pressures.
The US central bank’s unanimous decision leaves the interbank overnight federal funds rate at 2 percent, where it has been since April.
It said “downside risks to growth and the upside risks to inflation are both of significant concern,” surprising many in financial markets who had expected the Fed to signal greater worries on growth. Investors had begun to speculate this week that the central bank would lower rates in the wake of the bankruptcy of 158-year-old Lehman Brothers Holdings Inc., the sale of investment bank Merrill Lynch to Bank of America, and a scramble for cash by insurer American International Group Inc.
US stocks initially dropped in a sign of disappointment, but quickly turned higher. The dollar gained on the euro and prices for US government bonds held steady. “Strains in financial markets have increased significantly and labor markets have weakened further,” the Fed said in a statement announcing its decision. “Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters,” it added.
However, the central bank said already low benchmark interest rates and steps it has taken to ease funding strains in credit markets should help to promote growth over time.
While many analysts were surprised the Fed opted not to lower benchmark borrowing costs, some said policy-makers probably decided that doing so would have little effect.
“You could cut Fed funds rate from 2 percent to 1.5 percent, it won’t cause any more lending. The banking system has no capital base to lend,” said George Feiger, chief executive at Contango Capital Advisors in Berkeley, California.
“It may be psychologically nice if they want to play day games with the stock market, but why will they want to do that?,” he asked.