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Wed, Aug 08, 2007 - Page 10 News List

US Fed likely to keep rates given inflation worries

NO ADJUSTMENT Most economists believed that the Fed would keep the fed funds rate and prime rate unchanged for a ninth consecutive time


While Wall Street has been on a wild roller-coaster ride and housing troubles continue to mount, the Federal Reserve still seems to be most concerned about inflation.

For that reason, most economists believed Fed Chairman Ben Bernanke and his colleagues would keep interest rates unchanged for a ninth consecutive time after their meeting yesterday.

That would mean that the federal funds rate would remain at 5.25 percent, where it has been for more than a year. It would also mean that the prime lending rate, the benchmark for millions of consumer and business loans, would remain unchanged at 8.25 percent.

Both rates have remained at that level since June last year when the Fed raised the funds rate for a record-setting 17th consecutive time, capping a two-year campaign to push rates high enough to slow the economy and keep inflation under control.

While there was widespread belief that the central bank would not adjust interest rates, there was plenty of debate among economists over how the Fed would acknowledge the recent market turmoil, reflecting spreading worries about credit quality, especially in such areas as subprime mortgages, or loans offered to borrowers with weak credit histories.

Some analysts believed the Fed would acknowledge the market's worries and stress that if the credit problems became serious enough, it stands ready to supply extra cash to the banking system.

"I think they will comment on the lending crisis," said David Jones, chief economist at DMJ Advisers. "They need to say that the Fed is prepared to deal with any liquidity difficulties in the credit market."

While the Fed serves as the industry's lender of last resort, providing money to financial institutions when other sources of credit are difficult to obtain, other analysts said they were not sure the Fed would have much to say about current credit problems.

"It might make investors nervous if all of a sudden the Fed is elevating the importance of what is going on in financial markets," said Mark Zandi, chief economist at Moody's Economy.com. "The Fed has argued for some time that risks were improperly priced. To bail investors out at the first sign of losses would be a mistake that would just engender more risk-taking in the future."

Other analysts said the central bank would say little about credit troubles because it was unclear how much impact they would have on the overall economy.

"The fewer words the better," said Diane Swonk, chief economist at Mesirow Financial in Chicago. "They don't want to signal anything yet because things are up in the air."

At the moment, the economy is sending mixed signals. Overall economic growth, after slowing to an annual rate of 0.6 percent in the first quarter, rebounded to 3.4 percent in the second quarter.

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