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Inflation, growth fears behind decision. Experts predict hikes next year
By Jeannine Aversa
Associated Press
Published on Wednesday, Aug 06, 2008
WASHINGTON: Confronted by rising unemployment, shaky growth, credit troubles and creeping inflation, the Federal Reserve left an important interest rate unchanged Tuesday, taking a gamble that for now the best move was no move at all.
The next direction for rates probably is up but that's not likely until next year.
Chairman Ben Bernanke and all but one of his central bank colleagues agreed to leave its key rate alone at 2 percent for the second consecutive meeting.
In turn, the prime lending rate for millions of consumers and businesses remained at 5 percent. The prime rate applies to certain credit cards, home equity lines of credit and other loans.
''Although downside risks to growth remain, the upside risks to inflation are also of significant concern,'' the Fed said. Policymakers are faced with dueling problems: weak economic growth and advancing inflation. Treating one risks aggravating the other. The Fed indicated Tuesday that each problem poses about equal risks.
It was welcome news to Wall Street, however, where stocks put in their best showing in months on relief that the Fed's assessment of the economy and inflation wasn't worse. The Dow Jones industrials closed up 331.62 points at 11,615.77, its biggest one-day point gain since April 1, when it kicked off the second quarter with a nearly 400-point rally.
Many economists believe the Fed will leave rates where they are at its next meeting on Sept. 16 and through the rest of this year. This would give the fragile economy and crippled housing market more time to heal.
The Fed might start boosting rates, now at four-year lows, early next year, economists predict. Some Wall Street investors, though, haven't ruled out a rate increase later this year to fend off inflation. Either way, most agree the Fed's next move will be up. Keeping rates at low levels for too long could worsen inflation. The economy grew at a subpar 1.9 percent pace this spring — even with the federal tax rebate checks. It shrank late last year.
''The inflation fight probably will have to wait until 2009,'' said Lynn Reaser, chief economist at Bank of America's Investment Strategies Group.
WASHINGTON: Confronted by rising unemployment, shaky growth, credit troubles and creeping inflation, the Federal Reserve left an important interest rate unchanged Tuesday, taking a gamble that for now the best move was no move at all.
Get the full article here.
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