Fed Stands Pat

The Federal Reserve’s monetary policy committee has decided to leave the key short-term rate at 2 percent at its just concluded meeting. The decision comes despite pressure to cut in the wake of Lehman Brothers, the dire straits in which American International Group and Washington Mutual find themselves, and other vexations roiling the U.S. and world financial markets. Since the announcement, the market has been fluctuating broadly. They closed up strongly however. The Dow ended at up 141.51, or 1.3 percent; the Nasdaq was up 1.28 percent, or 27.99, at 2,207.90; the S&P 500 finished up 1.75 percent, or 20.90, at 1,213.60.In its statement after the meeting, the Fed noted that, “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. 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.”It added that high inflation, spurred by the earlier increases in the prices of energy and some other commodities led to staying any impulse to cut rates at present. But the committee did add that it “expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.”Both the risk of slowing growth and inflation were of concern, the statement added. It did say that it “wll monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.” The Fed has, in somewhat similar circumstances earlier this year, dropped the key rate quickly. In March, following an agreement to guarantee Bear Stearns’ assets that allowed for the bank’s subsequent acquisition, there was a 75-basis point fed funds reduction two days later. But the Fed had been in a rate-cutting mode previous to bailing out Bear Stearns, having cut the short-term rate an aggregate of basis 200 points in early 2008. Now the central bank, which declined to backstop Lehman’s assets over the weekend, thus allowing the investment bank to fail, may not be in the mood to cut interest rates so precipitously, or at all. The Fed has already injected an extra $50 billion into the financial system, on top of a routine $20 billion infusion, to help maintain liquidity. The central bank “stands ready to arrange further operations later in the day, as needed,” according to a statement it released earlier today.