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Fed keeps key rate unchanged

(China Daily/Agencies)
Updated: 2008-08-07 10:39

The Federal Reserve kept its benchmark interest rate at 2 percent and signaled that weak employment and financial instability will delay any increase in borrowing costs.

"Labor markets have softened further," the Federal Open Market Committee said in a statement in Washington. "Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth."

Stocks extended gains on speculation that policymakers will leave the rate unchanged in coming months. Officials said they still expect inflation to slow, while acknowledging that the outlook for prices is "highly uncertain".

"This says the Fed is on the hold for the rest of the year," said John Silvia, chief economist at Wachovia Corp in Charlotte, North Carolina, and a former chief economist at the Senate Banking Committee. "The next move may be up, but it won't occur for a while."

Dallas Fed President Richard Fisher dissented for a fifth time this year, preferring an increase.

"Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the committee," the statement said.

The Standard & Poor's 500 Index gained 35.87 points, or 2.9 percent, to 1,284.88. Stocks were also pushed higher by a retreat in crude oil prices.

The yield on the 10-year Treasury note rose 6 basis points to 4.02 percent as investors concluded that a crackdown on inflation isn't imminent.

America's economic outlook has deteriorated since policy makers last met on June 25, when they paused after the most aggressive series of rate reductions in two decades.

Gross domestic product shrank in the fourth quarter, and grew at just an average 1.4 percent annual rate in the first six months of this year, aided by some $78 billion in tax rebates mailed between late April and June. The consumer price index rose 5 percent for the year ending June, and the unemployment rate climbed to 5.7 percent.

'Right signals'

"They are sending the right signals," Martin Feldstein, an economics professor at Harvard University, said. While policy makers are concerned about inflation, "they are also very worried about the weakness in the economy".

The Fed is the first of three major central banks to set interest rates this week. The European Central Bank and Bank of England, also beset by faltering expansions and faster inflation, are forecast by economists to stand pat.

"Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities," the Fed said. "The committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain."