Fed Keeps Rates Steady, Increases May Be Coming

After almost a full year of rate cuts, many representing some of the most aggressive moves in decades, the Federal Reserve voted to hold steady the federal funds rate while suggesting that a future increase may be more likely than a reduction.


Despite a worsening housing crisis with hundreds of thousands of homeowners facing rate increases, the Fed considered inflation a more immediate concern to the U.S. economy.

With the exception of Richard Fisher, president of the Federal Reserve Bank of Dallas, Fed Chairman Ben Bernanke and the other members of the central bank voted to keep the benchmark rate at 2% for the time being.

In late April, the central bank made the last of a long series of rate cuts to bring the federal funds rate to the lowest level since 2004, when then Chairman Alan Greenspan began an even longer series of quarter-point increases to provide a “gentle landing” to the housing boom.

The end of the housing boom was anything but gentle, due in part to the Federal Reserve’s refusal to demand stricter underwriting standards amid a push by the White House to dramatically increase homeownership.

The foreclosure crisis which followed these decisions prompted Bernanke to reverse course and begin to cut rates dramatically to cushion the impact of the housing crisis and a related credit crisis on Wall Street.

April’s quarter-point reduction was the seventh consecutive rate cut by the Fed.

During the first three months of 2008, the central bank made a series of more aggressive rate cuts, including two three-quarter-point moves and one half-point cut.

Despite the ongoing housing slump, the comments provided by the central bank focused more squarely on the issue of inflation, prompting some Wall Street analysts to suggest an increase may be in the works.

Here is the full text of the Federal Reserve statement:

“The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2%.

Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.

The committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased.

The committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.”


Posted on Friday, June 27, 2008 by staff