Tuesday, September 16, 2008

Fed Leaves Key Interest Rate Unchanged; Dow Continues to Drops

UPDATE 2:45 p.m. Eastern

The Federal Reserve decided this afternoon to keep its federal funds rate unchanged at 2 percent despite the struggling global financial markets.

Scott Lanman and Craig Torres of Bloomberg reports:

"Downside risks to growth and the upside risk to inflation are both of significant concern," the Federal Open Market Committee said in a statement in Washington. "The committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability."

Chairman Ben S. Bernanke and his colleagues signaled they will continue to address market turmoil with emergency lending and aim monetary policy at a longer-term economic forecast that may still show the economy skirting a recession. Stocks fell after the decision, while the dollar gained and Treasuries remained higher.

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

The decision was unanimous, the first such agreement in a year.

The markets and the dollar had turned higher in today's trading as investors were anticipating the Fed would cut interest rates to calm worries related to AIG's financial problems. The Dow Jones Industrial Average was up 19.46 points to 10,936.97 at 2:12 p.m. Eastern. The S&P 500 was up slightly by 0.8 to 1,193.50 at the same time.

But the markets reacted to the Fed's announcement immediately. The Dow fell to 10,826.57 at 2:27 p.m., a 90.94 drop from the opening bell. The S&P 500 fell to 1,180.88 at the same time, a drop of 11.82 from the start of the day.

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