US Fed holds rate at 2% and warns of inflation

25 June 2008 19:39  [Source: ICIS news]

WASHINGTON (ICIS news)--The US Federal Reserve Board voted on Wednesday to keep its key federal funds interest rate at 2%, saying that continuing and record prices for energy and other commodities are raising concerns about inflation.

 

The US central bank’s rate-setting Federal Open Markets Committee (FOMC) said that while the US economy continues to expand in general, labour markets have softened 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,” the committee said.

 

The committee said that it expects inflationary pressures will moderate later this year and in 2009.  However, the central bank governors added, “in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high”.

 

Citing its two-year policy to ratchet interest rates down from their high of 5.25% in June 2006, the Fed said those lower rates and other central bank policies to increase financial market liquidity “should help to promote moderate growth over time”. 

 

However, the central bank warned that while downside risks to growth remain, “they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased”. 

 

That statement suggests that the Fed is unlikely to consider further rate cuts in the near future and may be eyeing a rate increase if inflationary pressures continue to mount.

 

($1 = €.64)

 

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By: Joe Kamalick
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