Fed Holds Rates Despite Market Turmoil

Aug. 7, 2007 — -- The Federal Reserve this afternoon once again left a key interest rate unchanged.

The central bank noted that financial markets have been volatile in recent weeks but said the economy nevertheless seems likely to continue to expand at a moderate pace.

The Fed said that core inflation has "improved modestly in recent months" but "a sustained moderation in inflation pressures has yet to be convincingly demonstrated."

The bank said its "predominant policy concern remains the risk that inflation will fail to moderate as expected."

The news was not what Wall Street was looking for at first and stocks initially fell sharply after the bank's decision. But they then rallied to climb out the hole, ending the day up moderately.

The Fed also reported today that consumers boosted their borrowing in June, in apparent response to the slumping housing market and growing troubles in mortgage markets.

When home prices were rising sharply in value, consumers were taking out home equity loans and using other types of mortgage financing instead of relying so much on credit cards.

However, with rising defaults in the subprime mortgage market, lenders have tightened standards for mortgage loans, forcing consumers to move back to credit card borrowing.

The Fed reported that consumer credit rose at an annual rate of 6.5 percent in June, the second straight sizable gain.

Total consumer credit rose by $13.2 billion in June to a record $2.459 trillion. The increase was double what economists had been expecting.

Wall Street had been eagerly awaiting the Fed's decision on interest rates after suffering through several jittery weeks. Stocks have been on a roller coaster ride recently, shooting up to new records one day and then plunging the next.

Interest rates have played a particularly important role. Banks and other lenders who gave mortgages to people with poor credit -- so-called subprime borrowers -- have seen those loans default at a higher than normal rate.