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A Fed surprise on rates

September 17, 2008|Tom Petruno | Times Staff Writer

The Federal Reserve typically doesn't like to surprise Wall Street, but it did Tuesday: Markets had been betting that policymakers would cut their benchmark short-term interest rate, but instead they stood pat, at 2%.

In their post-meeting statement, Fed Chairman Ben S. Bernanke and peers let us know that they feel the pain of the financial system and the economy -- but they plainly don't see this as a crisis in need of lower interest rates.

And they have a point: The credit crisis is largely an issue of access to money, not the price -- despite a surge in some short-term bank-to-bank interest rates (such as the so-called Libor rate) on Tuesday.

Some companies in need of capital just can't find investors or lenders at any price; hence, the fall of Lehman Bros.

What's more, the Fed itself is making plenty of money available to banks and major brokerages via short-term loan programs launched or expanded since spring. It isn't as if they're sitting on their hands.

The nut of the Fed's statement: "Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters."

Nonetheless, the Fed said, "Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth."

Financial markets handled their disappointment relatively well. Most U.S. stock indexes were up for the day.

Michael Darda, an economist at MKM Partners, praised the Fed's decision.

"The financial system is suffering at the hands of a solvency crisis," he said. Cutting short-term interest rates "won't solve this problem."

Christopher Rupkey, an economist at Bank of Tokyo-Mitsubishi, was more skeptical.

"Wall Street is in danger of sinking, the markets are in free fall and the Fed refuses to throw us a lifeline," he said. "Time will tell if this was the correct course of action."

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tom.petruno@latimes.com

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(BEGIN TEXT OF INFOBOX)

Fed statement

Here is the text of a statement issued Tuesday by the Federal Reserve:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2%.

Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction and some slowing in export growth are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities. The committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

The downside risks to growth and the upside risks to inflation are both of significant concern to the committee. The committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

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