U.S. Fed leaves rates unchanged, surprising markets

A crowd gathers Tuesday afternoon at the post that trades Constellation Energy on the floor of the New York Stock Exchange. Wall Street fluctuated in a wide range Tuesday after the Federal Reserve disappointed some investors by keeping interest rates unchanged. (Richard Drew/ Associated Press)

The U.S. Federal Reserve left interest rates unchanged Tuesday in a move that had Wall Street raising an eyebrow and that could signal the central bank's unwillingness to bail out the ailing American financial sector.

At its regularly scheduled interest rate meeting, the U.S. central bank's Federal Open Market Committee opted to leave the key Fed funds rate alone at two per cent.

The Federal Reserve said it believes that borrowing costs are already cheap enough to boost the economy.

"Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth, " the Fed said in a statement.

Inflation worries still there

The Federal Reserve also commented that, at current interest rates, the risks of choking off growth were roughly equal to the threat of soaring inflation.

"The downside risks to growth and the upside risks to inflation are both of significant concern to the committee. The committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability," the Fed said.

Cutting interest rates often stimulates growth but also increases inflationary pressures in the economy.

The move to leave rates unchanged appeared to surprise stock markets, which were battered by severe financial problems earlier in the week.

The Dow Jones industrial average had lost less than 40 points in morning trading. Stock selling, however, began to accelerate as soon as the announcement was made.

Within 15 minutes of the Fed's decision, the Dow was off slightly more than 100 points. By 3 p.m. ET, the New York market had reversed its direction and was up more than 60 points.

Monday's fall

Many economists and bond holders, whose investments are particularly sensitive to interest rate changes, had been thinking chairman Ben Bernanke and the U.S. central bank would cut rates by at least 0.25 percentage points.

Ben Bernanke, chairman of the U.S. Federal Reserve, in 2007. The Fed's latest interest-rate decision aims to balance the risks of inflation versus possibly choking economic growth.(Susan Walsh/Associated Press)

After Monday's stock selling free-for-all, stock watchers thought the Federal Reserve needed to send a signal to equity markets that Washington was interested in boosting the plummeting American financial services sector.

At the beginning of the week, the bankruptcy of investment bank Lehman Brothers and the takeover of Merrill Lynch & Co. by Bank of America shook financial markets around the world and had investors liquidating stock holdings in a bid to flee ailing equity markets.

The Toronto Stock Exchange's benchmark index and the Dow Jones index lost more than four per cent of their value by the end of the trading day on Monday.

In response, a number of government banks, including the U.S. Fed and the Bank of Canada, either boosted the amount of emergency cash available to debt-laden companies or relaxed the conditions under which these firms could access central bank money.

On Tuesday, for instance, the Federal Reserve and the Reserve Bank of New York said they would make $70 billion US available to corporations, many of whom face financial ruin because of their holdings of debt backed by faulty mortgages and other loans.

The Fed's non-decision on interest rates probably means the central bank is interested only in ensuring that sufficient capital exists for these ailing firms to access rather than lowering the cost of borrowing this money, analysts said.

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Federal Reserve leaves interest rates unchanged

U.S. Fed leaves interest rate unchanged

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