Fed leaves interest rate unchanged

The Federal Reserve, navigating treacherous economic waters, decided Wednesday to leave a key interest rate unchanged, bringing an end to a string of consecutive rate cuts.

The central bank announced that it was keeping the federal funds rate, the interest rate that banks charge each other, at 2 percent, marking the first time in 10 months that the central bank has failed to reduce interest rates at one of its regular meetings.

The Fed is confronted with the twin perils of a possible recession and rising inflation pressures, stemming from this year's surge in oil and food prices.

In a brief statement explaining the decision, Fed Chairman Ben Bernanke and his colleagues cited both the threats to growth and rising inflation pressures as problems confronting the economy at the moment.

The statement said that the downside risks to growth “appear to have diminished somewhat” while adding that “the upside risks to inflation and inflation expectations have increased.”

The Fed action was approved on a 9-1 vote with Richard Fisher, president of the Fed's regional bank in Dallas, casting a dissenting vote. Fisher objected to the action, saying he would have preferred an immediate increase in interest rates to fight inflation.

The decision to leave rates unchanged had been widely expected by financial markets.

Because of the Fed's decision, short-term borrowing costs on millions of consumer and business loans tied to banks' prime lending rate will remain unchanged. The prime rate is currently at 5 percent, its lowest level since late 2004.

Investors are split about the Fed's actions for the rest of the year. Some analysts believe the Fed could start raising rates, possibly as soon as the next meeting in August, because of concerns about inflation. Other economists argue that the weak economy and rising unemployment will keep the Fed on the sidelines until at least after the November elections.

While saying that the upside risks to inflation have increased, the central bank repeated its forecast that it expected “inflation to moderate later this year and next year.”

The opposing forces of weak growth and recession put the central bank in a bind. Its main policy tool – changes in interest rates – can only address one of those problems at a time. The Fed can cut interest rates to spur consumer and business spending and economic growth or it can raise interest rates to slow spending and growth and ease inflation pressures.

From September through April, the Fed aggressively cut interest rates seven times. However, after a series of sizable rate cuts as the credit crisis was roiling global financial markets at the beginning of this year, the Fed at its last meeting in April reduced rates by a more modest quarter-point and signaled that the rate cuts could be coming to an end.