NEW YORK (CNNMoney.com) — The Federal Reserve left its key short-term interest rate unchanged Wednesday at 2%, marking the first time in the nine months that it did not cut rates.
The central bank also raised alarms about inflation. But experts said it is still unclear what the Fed will do with interest rates at its next meeting Aug. 5 and for the remainder of the year.
The widely expected move Wednesday comes at a time when many economists and consumers are focusing on the rising price of oil and other commodities. The central bank has a mandate to fight inflation, which it typically does by raising rates.
In fact, Dallas Federal Reserve Bank president Richard Fisher voted for a rate hike at the meeting. The other nine members of the Fed’s policy-making committee were in favor of no change to interest rates.
In a statement, the Fed said it still expects inflation pressures to ease later this year, but cautioned about the upward pressure on prices caused by rising oil and other commodity prices.
In light of continued increases in those prices, the Fed said “upside risks to inflation and inflation expectations have increased.”
Some Fed watchers said the Fed had no choice but to talk tougher about inflation.
“The Fed is talking hawkish because it’s all they can do,” said Rich Yamarone, director of economic research at Argus Research. “It can’t cut rates due to the rising inflation environment and it can’t raise rates due to the frailty of the economy and financial markets.”
The central bank’s statement said that the rate cuts it has already made should help lead to improved economic growth ahead, although it cautioned the economy is still weak due to tight credit, a weak housing market and high energy prices.
The fed funds rate is an overnight bank lending rate used as a benchmark to set the rates that consumers pay for many types of loans as well as the prime rate used to peg the rates paid on certain business loans.
The central bank slashed its federal funds rate seven times since last September in an effort to keep the economy from weakening significantly in the wake of the housing slowdown and credit crisis rattling Wall Street and Main Street since last summer. (read more…)
