Fed As Expected: Holds At 2%, Balanced Outlook

The FOMC kept interest rates at 2% and maintained a balance between the risks of inflation and economic weakness. This is exactly what the market was expecting.

Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

The vote was 10-1. Richard Fisher, the Dallas Fed President dissented for the fifth time this year. The FOMC concluded that despite higher inflation, a rate hike couldn’t be justified because:

labour markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters.

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities. The committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

Both the European Central Bank and Bank of England are set to make policy decisions later this week. Like their American colleagues, the ECB and BoE are faced with soaring inflation just as financial markets and growth are weak.

The Fed’s Statement

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