Fed leaves interest rates alone but notes inflation risks

The Federal Reserve decides not to touch interest rates, while warning that inflation pressures still exist.

2 min read
The Federal Reserve decided today to keep interest rates unchanged, while warning that inflation pressures still exist.

After meeting for about five hours, the Fed's policy-making committee issued a brief statement that it left the federal funds rate, the interest that banks charge one other, at 6.5 percent.

In its statement, the Fed noted that overall demand in the economy has slowed down and that advances in productivity have also continued to "help contain costs and hold down underlying price pressures."

However, the Fed told investors that it is biased toward raising rates in the future if necessary. It warned that "risks continue to be weighted mainly toward conditions that may generate heightened inflation pressures in the future." The Fed believes that the tight labor market and high energy prices pose a "risk of increasing inflation expectations."

The Fed has raised rates six times for a total of 1.75 percentage points since June 1999. The last rate movement was an aggressive half-point increase on May 16.

Today's inaction didn't surprise economists and investors, as several recent economic reports have indicated the economy is slowing, and inflation remains tame.

At the time of the Federal Reserve's announcement today, the Dow Jones industrial average was up 137.25 points to 10,837.38. The index of 30 stocks has fallen more than 300 points, or nearly 3 percent, since the last Fed meeting Aug. 22.

The Nasdaq composite index, which also has fallen about 9 percent since the August meeting, was up 43.92 points to 3,612.82 in afternoon trading.

The Federal Reserve's primary mission is to keep inflation under control, and its main weapon is interest rates. When the Fed, which is chaired by Alan Greenspan, senses that the economy is growing at a rate that could ignite inflation, it often raises rates.

Rising interest rates make it more costly for businesses to finance expansion plans, putting the brakes on economic growth. Rising rates often result in falling stock prices, however.

The Federal Reserve's policy-making committee meets again Nov. 15, and some experts say that it is more likely that the Fed will adjust rates if the economy shows signs of heating up because the presidential election will have passed.