Fed Leaves Interest Rate Unchanged

Just yesterday, 158-year-old brokerage firm Lehman Brothers filed for bankruptcy. And over the weekend Merrill Lynch, the world's largest brokerage, was sold to Bank of America is what many saw as a preventive move to stop it from collapsing.

That news came just a week after the government took over mortgage giants Fannie Mae and Freddie Mac.

Joseph A. LaVorgna, chief U.S. economist for Deutsche Bank, said in a research note that this was the first time in a while where the policy outcome of today's meeting was uncertain.

LaVorgna and his staff warned that a rate cut could actually "backfire."

"The ongoing market crisis is not about the price of credit, but rather the availability of credit," he wrote. "Right now, financial institutions are fearful of further bankruptcies and counterparty risk. A lower Fed Funds rate does not directly address this."

Instead, earlier today the Federal Reserve pumped $70 billion into the financial system -- $50 billion more than expected -- to get money flowing again into the economy. The goal of this action is to prompt banks to make loans for everything from business expansions to mortgages to student loans, all in an attempt to prevent further financial problems.

Ed McKelvey, an analyst with Goldman Sachs, said the Fed's decision was "a close call."

He said in a note that since the committee last met in August, "conditions in financial markets and in the labor market have deteriorated while inflation risks have abated."

In fact, just this morning, the government reported that consumer prices in August had their first monthly decline in nearly two years. Inflation had jumped 1.1 percent in June and 0.8 percent in July. But as gas and oil prices finally started to fall in August inflation fell 0.1 percent.

It was not a big drop by any measure, but some Fed watchers said it might give the Central Bank just enough ammunition to justify a further rate cut.

"The weekend's events … obviously underscore the intensity of the financial stresses weighing on the US economy," McKelvey said. Based on that, he added, markets had priced in "a significant probability" of a rate cut.

McKelvey doubted that would happen, saying that "until very recently, most Fed officials have been thinking about when would be the most appropriate time to start raising rates."

Additionally, he said, some members might feel that a rate cut would signal panic, and that's the last thing an already-busy Fed wants.

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