Fed Leaves Rates Unchanged, Opens Door To Rate Hikes

(RTTNews) - In a widely expected move, the U.S. Federal Reserve announced on Wednesday that it has decided to leave its benchmark interest rate unchanged, ending a string of rate cuts aimed at stimulating the stagnant economy.

The Fed also indicated that it was turning its attention from supporting economic growth to fighting inflation, a move that opens the door for future rate hikes. In leaving rates unchanged, the central bank suggested that the threat to the economy has eased somewhat, while the danger of inflation has become more acute.

The central bank, led by Chairman Ben Bernanke, remains in a precarious position as it tries to battle rising prices while the economy continues to show signs of strain.

Following its regularly scheduled meeting, the Federal Open Market Committee, the policy-making arm of the U.S. central bank, announced that it has decided to leave its target for the federal funds rate at 2 percent.

This halted a series of rate cuts that began late last summer and took the Fed's key rate from 5.25 percent last September to its current level of 2 percent - its lowest level since November of 2004.

Commenting on the decision, the central bank said in its policy statement, "Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased."

This indicates that the Fed now sees inflation as a growing danger and the comment will likely be interpreted as setting the stage for an eventual rate hike.

Chris Low, chief economist at FTN Financial, said of the Fed's statement, "Given our expectation that retail sales will continue to surprise to the upside as the rebates work through the economy in June and July, the door is wide open to a rate hike as soon as the next meeting, in August."

The expectation that the central bank will soon start raising rates was underlined by the fact that Richard Fisher, president of the Federal Reserve Bank of Dallas, once again voted against the rate decision - the fourth dissenting vote he has cast since becoming a voting member of the FOMC in January.

Fisher, who had voted against the previous three rate cuts, said he would have preferred an increase in the benchmark rate at this meeting.

Traditionally, the central bank would react to a weak economy by striving to keep borrowing costs low in order to further boost the economy.

However, record prices for oil and other commodities have prompted fears about inflation - a fact that has led many experts to call for the Fed to begin raising rates soon in an effort to reign in rising prices.

Fisher, who has been one of the most vocal members of the hawkish wing of the Fed, said in a speech delivered on May 28, "I have said many, many times that inflation is a sinister beast that, if uncaged, devours savings, erodes consumers' purchasing power, decimates returns on capital, undercuts employment growth and real wages, and debases the currency."

He added in the May speech that curing inflation can require "harsh medicine" but that allowing even the perception that the Fed is following a "cheap-money strategy to accommodate fiscal burdens" would cause a long-term risk to the economy.

"The Federal Reserve will never let this happen," Fisher said at the time. "It is not an option. Ever. Period."

Philadelphia Federal Reserve President Charles Plosser, another outspoken Fed hawk, had voted against the rate cuts in March and April, but voted for Wednesday's decision to leave the benchmark rate at 2%.

While there has been increasing pressure for the Fed to turn its attention toward inflation, recent economic data have not pointed toward a clear recovery yet.

The lingering softness in the economy was underlined by a series of reports released earlier on Wednesday, which showed stagnancy in the country's heavy manufacturing segment and continued weakness in the beleaguered housing sector.

Wednesday morning, the U.S. Department of Commerce released a report showing that durable goods orders for May came in roughly unchanged with the previous month. Durable goods orders is an economic statistic that measures orders for items meant to last for at least three years, providing a good glimpse at the health of the heavy manufacturing segment.

In the report, data for the previous month was revised lower. The latest release showed a revised 1.0 percent decrease in April, compared to the 0.5 percent decrease originally reported for the month.

A separate report released Wednesday morning showed continued weakness in the housing sector. The Mortgage Bankers Association revealed that mortgage applications dropped 9.3% for the week ended June 20, adding to recent weakness and extending a multi-year low.

In another report about the housing sector, the government said new home sales dropped 2.5% in May, falling to a pace of 512,000 units.

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