Fed policy makers keep key rate steady

Federal Reserve Board policy makers kept their benchmark lending rate unchanged at 2 percent on Tuesday, highlighting the conflicting pressures of an epic financial crisis and nagging inflation.
Although the decision initially disappointed investors, analysts said it reflected the Fed's determination to separate basic monetary policy from the specific credit and cash problems on Wall Street.

Even as the Fed announced its decision to stand pat, officials were rushing to complete a huge loan package for American International Group, the troubled giant insurance company.
Some economists said the decision on rates also reflected the unhappy truth that a cut in the overnight federal funds rate might have merely highlighted the Fed's limited ability to solve a problem that entails the entire U.s. housing and mortgage markets.
By holding steady on interest rates, the Fed is reflecting the uncomfortable fact that interest rates have little to do with the credit crisis stemming from staggering losses on poorly underwritten mortgages and mortgage-backed securities.
The central bank's Federal Open Market Committee "has decided to stand pat despite the market turmoil," said Sung Won Sohn, an economist at California State University, Channel Islands, who studies financial markets.

"Lower interest rates at this time would not solve any problems in the financial markets," he said. "The market is not short of liquidity; it is short of confidence."
Even though consumer prices actually declined slightly in August, largely because of a drop in oil prices, the Fed noted that inflation had been high and that the outlook for prices "remains highly uncertain."
"The downside risks to growth and the upside risks to inflation are both of significant concern," said the Federal Open Market Committee, which sets interest rates.
Policy makers said they would "monitor economic and financial developments carefully," adding that they would "act as needed to promote sustainable economic growth and price stability."
Below the surface, the Fed continued to flood the markets with extra cash through its open-market operations in New York. On Tuesday morning, the Fed injected an additional $50 billion into the markets simply to keep the federal funds rate at its target level of 2 percent. The effective funds rate had climbed as high as 4 percent when markets opened.
The Fed indicated that it was watching closely to see if the broader economy would further stumble because of Wall Street's illness, which could happen if businesses and home buyers were unable to obtain credit.
"The financial markets aren't frozen because the federal funds rate is too high," said Michael Darda, chief economist at MKM Partners, an investment firm in Greenwich, Connecticut "The markets are frozen because there is a crisis of confidence. It's not a matter of whether the short rate is 2 percent or 1.5 percent."
By any measure, the economy has already slowed sharply. The United States has lost an average of 75,000 jobs a month since January, for a total loss of 605,000 jobs through August. The unemployment rate hit 6.1 percent last month, up from 4.9 percent in January.
Some sectors of the economy have been surprisingly strong. Exports have received a boost from the dollar's sharp drop against other major currencies, which makes American products cheaper in foreign markets, and from healthy growth in other parts of the world. But most forecasters predict that the export boom will probably fade as slower growth in the United States spills over to foreign markets.
The technology sector, which had been strong despite the economy's other problems, on Tuesday showed some signs of weakening. Dell warned that worsening conditions across the globe might hurt its third quarter — a message that set off a 10 percent drop in the price of Dell shares.


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