The Federal Reserve policymakers voted unanimously to keep interest rates unchanged in an expected move. However, they acknowledged that the nation’s economy is under pressure from the housing sector’s painful slump. While signaling that inflation fears remain a front-burner worry it dumped its reference to the possibility of pushing rates higher, leaving its options open. The decision was taken by the central bank to keep benchmark overnight rates unchanged at 5.25 percent, the level they had hit in June last year after 17 straight quarter-percentage point increases.
Though the decision has been already anticipated by the market, but the move is widely perceived as the decision was in response to the weakening of the economy and specifically to the meltdown in the subprime mortgage market. While keeping the key rate unchanged the Federal Reserve has effectively removed its ‘bias’ toward tightening monetary policy.
In the mean time the central bank’s Federal Open Market Committee is still engrossed on inflation as the main risk. In addition to it, they even acknowledged that risks of a severe slowdown are mounting. Some members of the committee had contended in the past for a more neutral statement, one that mentioned the possibility of rate cuts as well as rate hikes.
Moreover, the decision has raised the possibility among investors that there could be cut in the months ahead, fuelling an upbeat rally on Wall Street where investors are thirsting for a reduction.
The Fed however has taken a huge risk of loosing its hard-won credibility as a staunch inflation fighter by not raising rates to tackle inflation. In case, people start to expect higher inflation, prices will naturally be spiraling upward and the strength of the economy will be badly injured. Therefore, the Fed chief has taken a big gamble by leaving rates firm in the wake of undesirably high inflation.
