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Fed to Wall Street: No interest-rate gift this year

The Federal Reserve decides to keep interest rates unchanged, causing the Dow Jones industrial average and Nasdaq to erase early gains.

The Federal Reserve decided on Tuesday to keep interest rates unchanged, causing the Dow Jones industrial average and Nasdaq to erase early gains.

Disappointing investors and economists who were hoping for a cut in interest rates, the Fed's policy-making committee said in a brief statement that it will leave the federal funds rate, the interest that banks charge one another, unchanged at 6.5 percent.

The decision knocked the wind out of a moderate rally on Wall Street. At the time of the Federal Reserve's announcement, the Dow Jones industrial average was up about 129 points. The index of 30 stocks has remained almost unchanged since the last Fed meeting on Oct. 3.

The Nasdaq composite index, which has fallen about 7 percent since the October meeting, was up 59 points.

However, following the announcement, stocks tumbled. The Dow ended the day down 61.05 to 10,584.37 and the Nasdaq lost 112.81 to close at 2,511.71.

Since June 1999, the Fed has raised rates six times for a total increase of 1.75 percentage points. Since the last rate movement, an aggressive half-point increase on May 16, the Fed has decided to leave rates alone during its past five meetings.

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, as corporate earnings are crimped and interest-paying investments become more attractive.

The Federal Reserve's policy-making committee meets again Jan. 30 and 31. Many Wall Street analysts hope the Fed will start cutting rates then to prevent the economy from cooling down too much.