Citing worries about employment and the financial markets, the Federal Reserve's Federal Open Market Committee announced today that it would leave the federal funds rate unchanged at 2%. By doing so, the Fed hopes to balance the competing forces of inflation and a struggling economy. As its statement noted: "Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor 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."
But some economists suggested the outlook for the economy may not be as bleak as that sounds. "The good news at this juncture is that world economic growth has slowed down enough to induce a large downward correction in commodity prices--the positive benefits of which will start to be evident in September's data releases," said Brian Bethune, chief U.S. economist at Global Insight, a research firm in Lexington, Mass. "That should provide the FOMC with a little more breathing room on policy as we [move] into the fall of 2008, a period that will be fraught with further downside risks as the effects of the economic stimulus rebates wears off. Under these circumstances, we believe that the Fed will be in a position to hold rates steady well into 2009--longer than what the markets currently expect."
The federal funds rate is the interest that banks charge on short-term loans to each other and influences interest rates such as mortgages, home loans, and more by affecting the money supply. According to Freddie Mac's weekly survey, rates for a 30-year fixed-rate home loan stood at 6.52 percent last week, one of the highest points all year.