US Central Bank Leaves Interest Rates Unchanged

Washington 25 June 2008

After steadily cutting interest rates for much of the past year, the U.S. central bank has decided to keep them unchanged, while signaling concerns about inflation that could trigger interest rate hikes in the future. VOA's Michael Bowman reports from Washington, where Federal Reserve policy makers concluded a two-day meeting Wednesday.

The Federal Reserve typically raises interest rates during periods of brisk economic activity that tend to boost inflationary pressures, and usually cuts interest rates when the economy falters and inflationary risks are low.

But the U.S. economy remains weak and American consumer confidence continues to plunge, while inflationary pressures, led by rising energy costs, have been growing.

Further interest rate cuts could heighten the risk of inflation, yet raising interest rates could send a weak economy into a full-blown recession.

If each option poses undesirable risks, perhaps the best course of action is to maintain the status quo. That appears to be the Fed's thinking, at least for now, as it chose to keep interest rates unchanged.

In a statement, the central bank said recent interest rate cuts should set the stage for a return to moderate economic growth, although it could not discount the possibility of a recession, saying that "downside risks" to growth remain. At the same time, the Fed said, in light of price increases for energy and other commodities, uncertainty about the inflation outlook remains high.

Given that uncertainty, many economists say the Federal Reserve will continue to face tough decisions in the months ahead.

"The Fed is facing probably one of the most difficult circumstances that is has faced in three decades," said Julia Coronado, a senior economist with the New York-based investment firm, Barclays Capital. "We are seeing some pretty pervasive inflationary pressures. They [Fed policy makers] learned in the '70s that you cannot successfully accommodate an energy price shock with lower [interest] rates. That, ultimately, it does fan the flames of inflation."

In the 1970s, the United States faced similar circumstances of slow growth amid rising prices - what economists refer to as "stagflation." The U.S. economy returned to robust growth with low inflation in the 1980s, but only after the Federal Reserve dramatically raised interest rates and America suffered a deep recession.

After steadily cutting interest rates for much of the past year, the U.S. central bank has decided to keep them unchanged, while signaling concerns about inflation that could trigger interest rate hikes in the future. VOA's Michael Bowman reports from Washington, where Federal Reserve policy makers concluded a two-day meeting Wednesday.

The Federal Reserve typically raises interest rates during periods of brisk economic activity that tend to boost inflationary pressures, and usually cuts interest rates when the economy falters and inflationary risks are low.

But the U.S. economy remains weak and American consumer confidence continues to plunge, while inflationary pressures, led by rising energy costs, have been growing.

Further interest rate cuts could heighten the risk of inflation, yet raising interest rates could send a weak economy into a full-blown recession.

If each option poses undesireable risks, perhaps the best course of action is to maintain the status quo. That appears to be the Fed's thinking, at least for now, as it chose to keep interest rates unchanged.

In a statement, the central bank said recent interest rate cuts should set the stage for a return to moderate economic growth, although it could not discount the possibility of a recession, saying that "downside risks" to growth remain. At the same time, the Fed said, in light of price increases for energy and other commodities, uncertainty about the inflation outlook remains high.

Given that uncertainty, many economists say the Federal Reserve will continue to face tough decisions in the months ahead.

"The Fed is facing probably one of the most difficult circumstances that is has faced in three decades," said economist Julia Coronado. "We are seeing some pretty pervasive inflationary pressures. They [Fed policy makers] learned in the '70s that you cannot successfully accommodate an energy price shock with lower [interest] rates. That, ultimately, it does fan the flames of inflation."

In the 1970s, the United States faced similar circumstances of slow growth amid rising prices - what economists refer to as "stagflation." The U.S. economy returned to robust growth with low inflation in the 1980s, but only after the Federal Reserve dramatically raised interest rates and America suffered a deep recession.