Fed keeps rates on hold as economy sputters
Thursday, 7 August 2008
WASHINGTON, Aug 6 (AFP): The Federal Reserve, in a widely predicted move, kept its main interest rate unchanged at 2.0 per cent yesterday citing concerns about sputtering economic growth and inflationary pressures.
The Dow Jones Industrial Average rocketed 331 points to close at 11,615.77 as investors cheered the announcement, although tumbling oil prices also boosted Wall Street's spirits.
The Fed said that relatively low rates should eventually fire up growth going forward, but warned that multiple hurdles stand in the path of a potential economic revival.
"Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters," the central bank cautioned.
Most economists expect the Federal Open Market Committee, chaired by Ben Bernanke, to maintain the federal funds rate at 2.0 per cent for some time.
Feinman said the Fed kept rates on hold because of fears that the world's largest economy would "struggle" for momentum in the second half of the year amid a lingering housing downturn, a credit crunch and high oil prices.
Brain Bethune, chief US financial economist at Global Insight, agreed that rates are unlikely to change anytime soon.
The Fed has now kept the fed funds rate on hold for two straight policy meetings after slashing rates by 3.25 percentage points between September and late April in an attempt to kick-start flagging growth.
The Fed stressed that it remains concerned about energy costs even though oil prices have cooled markedly in recent weeks to around 119 dollars a barrel Tuesday from record peaks over 147 dollars last month.
Searing energy prices have sapped economic momentum and lightened Americans' wallets in the past year, but Fed officials believe sluggish growth will weaken fuel prices, especially as America is the world's largest oil importer.
A government survey Monday showed that headline inflation jumped 0.8 per cent during June, marking its biggest monthly gain since 1997.
Aside from the ailing housing and credit markets, some economists are also becoming more concerned about the labour market, especially after the unemployment rate ticked up to 5.7 per cent in July to a four-year high.
While voicing sustained concern about inflation, the Fed did note that employers are continuing to cut jobs.
Other economists believe the central bank could lift rates sooner, especially if the 14-trillion-dollar economy starts firing on all its cylinders.
US gross domestic product (GDP) growth accelerated to 1.9 per cent during the second quarter, compared with 0.9 per cent during the first quarter, and after a 0.2 per cent contraction in the fourth quarter of 2007.
But fears are mounting that GDP growth could falter again in the second half of the year as the effects of an emergency 168-billion-dollar economic stimulus-which propped up second- quarter growth-wear off.
Most economists expect growth to remain sluggish in the next couple of months particularly as the credit crunch continues to plague major banks and finance firms.
Although the Dow posted its best one-day spurt in four months Tuesday, it is down 12 per cent for the year-to-date.
The Dow Jones Industrial Average rocketed 331 points to close at 11,615.77 as investors cheered the announcement, although tumbling oil prices also boosted Wall Street's spirits.
The Fed said that relatively low rates should eventually fire up growth going forward, but warned that multiple hurdles stand in the path of a potential economic revival.
"Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters," the central bank cautioned.
Most economists expect the Federal Open Market Committee, chaired by Ben Bernanke, to maintain the federal funds rate at 2.0 per cent for some time.
Feinman said the Fed kept rates on hold because of fears that the world's largest economy would "struggle" for momentum in the second half of the year amid a lingering housing downturn, a credit crunch and high oil prices.
Brain Bethune, chief US financial economist at Global Insight, agreed that rates are unlikely to change anytime soon.
The Fed has now kept the fed funds rate on hold for two straight policy meetings after slashing rates by 3.25 percentage points between September and late April in an attempt to kick-start flagging growth.
The Fed stressed that it remains concerned about energy costs even though oil prices have cooled markedly in recent weeks to around 119 dollars a barrel Tuesday from record peaks over 147 dollars last month.
Searing energy prices have sapped economic momentum and lightened Americans' wallets in the past year, but Fed officials believe sluggish growth will weaken fuel prices, especially as America is the world's largest oil importer.
A government survey Monday showed that headline inflation jumped 0.8 per cent during June, marking its biggest monthly gain since 1997.
Aside from the ailing housing and credit markets, some economists are also becoming more concerned about the labour market, especially after the unemployment rate ticked up to 5.7 per cent in July to a four-year high.
While voicing sustained concern about inflation, the Fed did note that employers are continuing to cut jobs.
Other economists believe the central bank could lift rates sooner, especially if the 14-trillion-dollar economy starts firing on all its cylinders.
US gross domestic product (GDP) growth accelerated to 1.9 per cent during the second quarter, compared with 0.9 per cent during the first quarter, and after a 0.2 per cent contraction in the fourth quarter of 2007.
But fears are mounting that GDP growth could falter again in the second half of the year as the effects of an emergency 168-billion-dollar economic stimulus-which propped up second- quarter growth-wear off.
Most economists expect growth to remain sluggish in the next couple of months particularly as the credit crunch continues to plague major banks and finance firms.
Although the Dow posted its best one-day spurt in four months Tuesday, it is down 12 per cent for the year-to-date.