By Susan A. Baird
PBN Web Editor
WASHINGTON – Federal Reserve policymakers today defied expectations, ending their two-day session with a vote to keep their benchmark interest rate unchanged at 2.0 percent for the third meeting in a row.
“Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending,” the Federal Open Market Commission acknowledged in a statement this afternoon.
“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. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.”
Analysts surveyed by Econoday Inc. had called for a 0.25-percentage-point rate cut to 1.75 percent. The futures markets also had expected the FOMC would pare rates to 1.75 percent or lower, with traders putting the chances of a rate cut at 80 percent, according to Bloomberg News.
“The committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain,” the FOMC said. “The downside risks to growth and the upside risks to inflation are both of significant concern.”
Its decision to stand pat on the federal funds rate – the target interest rate for overnight loans between banks – came in a unanimous vote that was the first this year for the FOMC. Christine M. Cumming voted in place of Timothy Geithner, president of the Fed Bank of New York, who stayed home to continue talks about ailing insurance giant American International Group Inc.
A rate cut would have indicated that Fed officials believe the turmoil that has seized the financial markets in the past two days “is likely to continue and there may be much deeper repercussions,” former St. Louis Fed President William Poole had told Bloomberg Television before the decision. “The right position is [that] the market is taking care of this, as painful as that is.”
But Lyle Gramley, a former Fed governor who now is a senior economic adviser at Stanford Group Co., compared the Fed’s decision today with its wait-and-see approach last summer – at the beginning of the credit crisis last summer – when it waited a month to lower the funds rate.
The stock markets lurched back and forth between positive and negative territory for the day, finally settling up on the up side on expectations that the Federal Reserve was going to bail out American International Group Inc., according to Bloomberg News.
The Dow Jones Industrial Average added 141.51 points, or 1.3 percent, to close at 11,059.02, after twice erasing losses of more than 100 points. The S&P 500 increased 20.89 points, or 1.8 percent, to 1,213.59. More than two stocks rose for each that fell on the New York Stock Exchange, after the steepest drop in prices since the bursting of the dot.com bubble.
“This is a market that’s not looking at fundamentals,” said Quincy Krosby, who helps manage $380 billion as chief investment strategist at the Hartford in Hartford, Conn., told Bloomberg News. “It’s going back and forth based on rumor and headlines and it has temporarily divorced itself from fundamental analysis.”
Meanwhile, the overnight dollar rate – a key short-term lending rate – more than doubled today to 6.44 percent, from yesterday’s 3.33 percent, despite the New York Fed’s injection into the banking system $70 billion in temporary reserves yesterday and another $70 billion today, Bloomberg said. That cash infusion was part of more than $210 billion poured into the financial system by central banks around the world to soothe an industry roiled by the collapse of Lehman Bros. Holdings Inc., the buyout of Merrill Lynch and the crisis at AIG.
“The Fed has made a lot of credit available,” Dan North, chief economist of credit insurer Euler Hermes, a unit of Allianz SE, in Owings Mills, Md., told Bloomberg News. “But no one wants to use it, because there’s still fear that whoever you lend it to is going to go bankrupt.”
Additional information, including the full statement issued today by the Federal Open Market Committee, can be found at www.federalreserve.gov.
