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US Federal Reserve raises possibility of interest rate cut in months ahead

The US Federal Reserve held interest rates steady and raised the possibility they could be cut in the months ahead, igniting a rally on Wall Street, where investors are thirsting for a reduction.

Federal Reserve (Fed) Chairman Ben Bernanke and his colleagues at the US central bank left an important interest rate unchanged at 5.25 percent, the sixth straight meeting without budging the rate.

The decision was unanimous.

STOCKS

On Wall Street, stocks rose sharply. The Dow Jones industrials closed up 159.42 points at 12,447.52 in the index's biggest one-day gain since July 24.

The Fed's decision means that commercial banks' prime interest rate -- for certain credit cards, home equity lines of credit and other loans -- stays at 8.25 percent. The Fed has left rates alone since last August, giving borrowers time to catch their breath after two years of steadily rising rates.

WIDENING OPTIONS

In an important change, Fed policymakers got rid of language from previous policy statements that suggested their next move could be a rate increase. Instead, the Fed is now widening its options and raising the possibility that rates also could go down.

Investors are betting the Fed will cut rates later this year to guard against any undue economic weakness. Many economists predict the central bank will probably start cutting rates early next year.

SLOWLY SHIFTING

"The needle has shifted a little more to the center. I think they are more open to easing rates than they would have been several months back," said Lynn Reaser, chief economist at Bank of America's Investment Strategies Group.

"They are moving away from the notion there could only be a rate increase," she said.

FORECAST

The Fed is still sticking to its forecast that inflation should recede over time and that the economy -- despite strains from the housing slump and troubles facing lenders and borrowers of risky mortgages -- should log moderate growth over the coming quarters.

After citing some inflation improvements in its last statement, the Fed this time noted that underlying inflation readings have been "somewhat elevated" since then.

Fed policymakers continued to make clear that the biggest risk to the economy is inflation.

The "predominant policy concern remains the risk that inflation will fail to moderate as expected," Fed policymakers said.

To fend off inflation, the Fed steadily boosted interest rates for two years, the longest stretch in its history. But since last summer, it has left rates alone.

The Fed's goal is to slow the economy sufficiently to thwart inflation but not so much as to cripple economic activity.
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