MercoPress. South Atlantic News Agency

Fed fears inflation and leaves rates unchanged at 5.25%

Fearing that inflation will fail to moderate as expected the United States Federal Reserve Open Market Committee left on Tuesday interest rates unchanged. Analysts had widely predicted the Federal Reserve would leave rates at 5.25% for a 13th month, and that was the unanimous verdict of the Fed panel.

Concerns over the US economy's health have been mounting amid a rise in bad debts with markets oscillating widely in recent weeks as worries about the prolonged slump particularly in the housing market and sub prime-lenders have surged with an overall "re-pricing" of credit expected. However according to the Fed release "US economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy". The Fed admits that readings on core inflation have improved modestly in recent months, "however, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures". In an effort to control spiraling inflation - and bring about a gradual soft landing for the US economy the Fed under chairman Ben Bernanke has raised rates for a record-setting 17th time in a row to 5.25% in June last year. But oil prices - one of the main drivers of inflation - have remained stubbornly high at over 70 US dollars a barrel, leading to high energy costs which have prevented the Fed from cutting rates. On this line of thinking the Fed release states that "although the downside risks to growth have increased somewhat, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by incoming information". But economists and market analysts believe the chances of a rate cut in coming months is now significantly greater than a rise but they remain split on whether a cut will take place this year or next. 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; Frederic S. Mishkin; Michael H. Moskow; William Poole; Eric Rosengren; and Kevin M. Warsh. The Fed is scheduled to meet again September 18.