Fed Leaves Rate Untouched, Ending Streak

In Depth

A Federal Reserve panel leaves the federal funds rate unchanged at 5.25 percent — a move that temporarily halts more than two years of incremental rate hikes.

In remarks accompanying its decision, the Federal Open Market Committee cited a slowing economy as part of its reason not to increase the rate banks pay to take out overnight loans. A hike in the federal funds rate often means higher interest rates for consumers.

Two factors at play in the economic slowdown were a slower housing market and higher energy prices, the committee said in its notes. Echoing remarks made earlier by Fed Chairman Ben S. Bernanke, the panel said it expects the slowdown to help mitigate risks of inflation.

The move to leave the rate untouched was approved by all on the 10-member panel except for Jeffrey M. Lacker, the Richmond Federal Reserve president, who sought a quarter-point increase.

The last time the FOMC cut the funds rate was June 25, 2003, when it stood at 1 percent. One year later, the quarter-percent hikes began that lasted until today's meeting. The rate is now 5.25 percent, which translates into an 8.25 percent prime rate.

The effect of the new Fed policy on mortgage rates is difficult to determine. After a historically low period, monthly averages for 30-year fixed mortgages have been above 6 percent since October of 2005, according to Freddie Mac, one of the nation's largest mortgage lenders. But after rising for much of the year, the rate has fallen since the middle of July.

Read the Remarks of the FOMC:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

Readings on core inflation have been elevated in recent months, and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack Guynn; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting.

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