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Fed leaves rates unchanged at 5.25% but main “concern” is inflation

Wednesday, May 9th 2007 - 21:00 UTC
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In a move widely expected the United States Federal Reserve kept its main interest rate on hold at 5.25%, but warned that its predominant policy concerns remains “the risk that inflation will fail to moderate as expected”.

The Fed's official release states that "economic growth slowed in the first part of this year and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to expand at a moderate pace over coming quarters. "Core inflation remains somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures. "In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information". The Fed last increased the cost of borrowing in June 2006, bringing to an end two years of rises. Recent comments from the Fed have signalled it may be willing to consider a cut in rates later this year. In a statement following its rate decision in March, the Fed suggested that inflation fears had subsided slightly, raising the prospect of a possible future cut in rates, analysts said. Wednesday's decision marked the seventh straight meeting at which the Federal Reserve moved to keep interest rates unchanged. The latest decision by the Fed comes a day before key rate decisions by the Bank of England and the European Central Bank. UK interest rates are widely expected to rise by a quarter of a percentage point to 5.5%, because of concerns about inflation. The Fed's decision also comes amid rising concerns about the US housing sector, in particular the sub-prime mortgage market which provides mortgages to people with poor credit histories. Previous steady increases in US interest rates have pushed defaults to near-record levels. At the same time, analysts have been questioning whether some of the industry's biggest sub-prime lenders will be able to survive amid the rising tide of defaults. The Fed release ends saying voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan; Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh. FOMC is scheduled to meet again next June 27/28.

Categories: Economy, United States.

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