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Trying to project an appearance of calm and stability amid the turmoil of financial markets, the Federal Reserve on Tuesday (Sept. 16) held its benchmark fed funds rate at 2.0%, according to CBS MarketWatch.
This is the third straight meeting with no change in rates.
In a statement, the Fed raised its concern about an economic downturn and slightly moderated its concerns over inflation. The Fed said that strains on financial markets had “increased significantly.”
“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,” the statement said.
On inflation, the most important point was what the Fed didn’t say. It removed language from its previous statement pointing to a disturbing rise in inflation expectations.
All together, the statement moves the central bank in the direction of a rate cut, but the movement was subtle rather than anything dramatic.
Wall Street had been divided about what the Fed would do after a stunning shake-up over the weekend in which Lehman Brothers declared bankruptcy and Merrill Lynch moved to sell itself to Bank of America.
Some analysts said a rate cut was absolutely necessary, while others argued just as strongly that the Fed should hold steady.
The economy outlook has darkened since the last FOMC meeting on Aug. 5. The unemployment rate jumped to 6.1% in August and consumer spending has slowed down.
Economists expect the credit crunch to be protracted and it could slow growth in the fourth quarter and next year.
Markets were shocked Monday when Treasury Secretary Henry Paulson drew a line in the sand and refused to provide taxpayer money to bail out Lehman. The government has bailed out Bear Stearns and the two mortgage giants, Fannie Mae and Freddie Mac.
The Fed and other central banks injected extra cash into the banking system to keep money markets from seizing up.