Fed holds rate steady

The Federal Reserve Board held the economy’s key interest rate at 2% today in a bid to keep inflation in check. The decision to keep the federal funds rate unchanged ended a streak of seven consecutive meetings that resulted in cuts. Since September, the Federal Reserve had slashed the rate to 2% from 5.25%. “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 Federal Reserve Open Market Committee said in a statement. The Fed cautioned that labor markets have “softened further” and financial markets remain under “considerable stress,” adding that 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. However, the Fed noted that overall economic activity continues to expand, reflecting some firming in household spending. The Fed’s decision to stand fast recognized the level of inflationary pressure and its downside risks to the economy, said Gary B. Cloud, senior vice president and portfolio manager at AFBA 5Star Funds Inc. of Alexandria, Va. “They downgraded the growth risks to the economy, and emboldened themselves to fight inflation,” he said. The market has priced in two quarter-point rate hikes for the remainder of the year, but the FOMC might not be in a position to raise rates just yet, added Mr. Cloud. Douglas S. Roberts, chief investment strategist at Channel Capital Research Institute LLC of Shrewsbury, N.J., doesn’t foresee any rate hikes in the near future. “They want to maintain their inflation-fighting credentials with the overhang of the weak housing market, unemployment and higher fuel prices,” he said. “The Fed is locked in. I don’t expect them to raise rates anytime soon unless the economy stabilizes quite a bit.” The federal funds rate is the interest that banks charge when borrowing from each other.