Fed holds interest rates steady

John W. Schoen Senior Producer • Profile • E-mail

Federal Reserve policymakers left interest rates unchanged Wednesday for a second straight meeting, as a sharp drop in oil prices helped ease inflation concerns.

The central bank left the benchmark overnight lending rate at 5.25 percent, exactly where it has been since June 29, when the Fed halted a two-year stretch of 17 consecutive rate hikes.

The long rate-hike campaign was intended to keep the economy from overheating and sparking a damaging run-up in inflation. But with the economy showing clear signs of slowing, and energy prices plummeting, Fed Chairman Ben Bernanke and his colleagues have gotten some major breathing room in their effort to keep inflation contained.

Traders and analysts looked for some insight into the Fed’s next move by reading the tea leaves of the Fed’s comments on Wednesday’s decision.

“The moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market,” the Fed’s Open Market Committee said in its statement.

The group cautioned that “some inflation risks remain,” noting that “readings on core inflation have been elevated, and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures.”

But it said that “inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.”

As for future rate changes, the FOMC said the “extent and timing” of those moves “will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.”

One member of the Fed's policymaking panel, Jeffrey Lacker, disagreed with the decision, voting instead for another quarter-point increase in the federal funds rate.

As short-term rates have risen, rates on loans to consumers and businesses -- including mortgage rates -- have followed suit. The overnight rate hit a 46-year low of 1 percent in 2003, sending mortgage rates to their lowest levels in decades and helping to fuel the boom in real estate.

But as mortgage rates have moved higher, the housing boom has cooled rapidly, raising concern about a potential ripple effect that could slow the economy's growth. On Tuesday, the Commerce Department reported that construction of new homes fell 6 percent in August, a much bigger decline than analysts had been expecting. Building permits hit their lowest level in nearly four years, a sign that the slowdown will continue in the months ahead.

A steep drop in energy prices has helped offset the hit taken by the housing sector. With oil prices down 20 percent since mid-July and pump prices down 15 percent and falling, fears have rapidly dissipated that high energy prices could touch off another 1970s-style round of inflation. If the recent drop in energy prices holds, Fed watchers say interest rates have likely peaked for now.

“It gives the Fed more reason to stand pat (on rates) beyond the September meeting into the meetings in the final three months of the year,” said Stuart Hoffman, chief economist at PNC Financial.

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