Smart Borrower Blog

Fed Holds Interest Rate Steady on Inflation Concerns

Sep 17th, 2008 @ 9:02 PM by Amber Nelson

In spite of a slower economy and an ailing mortgage market, the Federal Reserve refrained from changing its key interest rate Tuesday.

The federal funds rate, the fee banks charge each other for overnight transfers, has been held at 2.0 percent since April of this year. The rate has an impact on banking and mortgage interest rates, affecting the general ease or difficulty of obtaining  financing.

In its press release, the Federal Open Market Committee (FOMC) recognized the current strains on the economy, saying “strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.”

Yet the FOMC stated that its greatest concern at present is to control inflation. “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,” the statement said.

Later the same day, the Fed released a statement authorizing New York’s central bank to loan up to $85 billion to insurance corporation AIG (American International Group) to keep it  from going belly-up and further depressing the troubled economy.

“The Board determined that, in current circumstances,” the statement read, “a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance.”

AIG will have 24 months to sell off its smaller companies and subsidiaries, during which time it can draw on loan funds from the New York Fed.

This was an unexpected move, especially after the federal government refrained from bailing out the bankrupt Lehman Brothers corporation earlier in the week. Yet stocks rose on news of the Fed loan, soon after they fell on news of the unchanged interest rate.

About Amber Nelson
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to and

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