Fed leaves interest rates unchanged in face of financial turmoil

WASHINGTON -- Deciding against a change in policy, the Federal Reserve suggested Tuesday that lower interest rates wouldn't help ailing financial markets.

Fed Chairman Ben Bernanke and his colleagues voted unanimously to keep their target for short-term interest rates, which influences borrowing costs economywide, at 2%, the lowest in nearly four years. In a statement released at the end of their meeting, Fed policymakers expressed "significant" concerns about both inflation and the economy, suggesting they may stand pat on rates for some time.

"Strains in financial markets have increased significantly, and labor markets have weakened further," the Fed said, adding that the economy is slowing in part because of softening consumer spending.

The Fed said it expects the economy to be sluggish into 2009, but previous steep interest rate cuts, combined with ongoing efforts to pump cash into financial markets, should "help promote moderate economic growth." The Fed said it expects inflation to ease later this year and next, but the outlook remains "highly uncertain."

While not adjusting rates, the Fed has acted in other ways to address market difficulties. Early Tuesday, the Fed said it would provide greater-than-usual liquidity to financial markets and is ready to do more. Hours before investment bank Lehman Bros. filed for bankruptcy protection early Monday, the Fed made it easier for investment banks to take out short-term loans. The moves were intended to reassure jittery traders and financial firms.

Some economists and market participants clamored for a rate cut after the Dow Jones industrial average took its steepest dive in seven years Monday. Comerica Bank chief economist Dana Johnson says lowering rates would have created the impression the Fed was being forced by the markets to cut.

"I'm so happy to see the Fed act with … more perspective rather than be led around by the nose by the market," Johnson says, noting rates are already very low.

The Fed's decision to leave rates unchanged is good news for savers, who have seen rates on certificates of deposit move higher, Bankrate.com's Greg McBride says. The average rate for a one-year CD was 2.46% last week, but several national banks are offering rates of 4.25% or more.