Fed Ends Streak of Seven Straight Rate Cuts

June 25, 2008— -- The Federal Reserve by a 9-to-1 vote this afternoon left interest rates at current levels, putting an end to seven consecutive rate cuts.

Since September, the central bank has been aggressively cutting its key Fed Funds interest rate to stimulate an economy hammered by a collapsing housing market and the tightening of credit. Rates now stand at 2 percent, down from 5.25 in September.

The Fed faces a conflicting mandate of keeping rates low enough to stimulate growth in the economy but not so low that inflation gets out of control.

Click Here to Learn More About the Economy in Your Home State

For months, Fed Chairman Ben Bernanke and the other members of the bank's open market committee, have focused on growth. But now many Fed watchers are saying that focus is shifting to inflation.

So to reach that balance, the central bank decided -- for now -- to leave rates where they are.

"Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending," the Fed said in its statement. "However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.

One member of the rate-setting committee, Richard W. Fisher, voted against the decision preferring instead to increase the rate now.

In its statement, the Fed committee said it expects inflation to moderate later this year and next year but warns that there is high uncertainly in such a prediction because of the high increases in energy and some commodity prices.

Since the Fed last met in April, the outlook for the growth has gotten better and the outlook for inflation has gotten a bit worse, said David Wyss, chief economist for Standard & Poor's.

But still, Wyss said, "I don't think we are out of the woods yet on the recession side."

Inflation is climbing, mainly driven by food and energy prices.

"I think the next move is going to be up, but not yet," Wyss said before the Fed's announcement. "I can't see them doing it before the election. I don't think there's enough reason to do it."

While credit card and mortgage rates are not directly tied to the Fed Fund rate, those loans and several others tend to generally rise and fall with the central bank's decision.

Wall Street had widely expected the Fed to leave interest rates alone. What investors and traders were really looking for was the carefully worded statement the central bank normally releases with its rate decision.

Stocks had traded up moderately throughout the morning and early afternoon and initially held on to those gains.

Robert A. Brusca, who runs his own economic consulting firm Fact and Opinion Economics, said the Fed has "a three-pronged problem." It might balance growth, inflation and "financial turmoil" and somehow reflect those concerns in its statement.

That dual mandate, he said, is "a little tougher than walking and chewing gum at the same time."

Brusca said Bernanke and the Board of Governors have done a poor job of communicating their message in the post-meeting statements and in various speeches. One day, Brusca said, Bernanke will be warning about inflation and a few weeks later the Fed is talking about growth and credit.

"We're pretty confused about what they're doing," he said.

Brusca said part of the problem is that each time the Fed meets it tries to get all the committee members to agree on one message. The easiest way to do that, he said, is to simply tweak the statement from the last meeting.

"They can't get people to agree on it so they try to insert that one word or that one comma or that one little thing that changes it," he said. "They need to write a new statement from scratch every single time. They need to write a statement that is a little bit more discursive rather than cryptic. We're stuck trying to figure out what is going on."