The Federal Reserve kept the overnight federal funds rate steady at 5.25 percent for the ninth straight meeting, and it said that inflation remained its main concern despite signs of slowing growth.
The economy grew at annual rate of 3.4 percent in the second quarter of 2007 after a revised rate of 0.6 percent in the first three months of the year. The Fed believes that expansion will slow in the second half of the year and have set predictions of 2.25 percent to 2.5 percent for this time period.
Although growth looks to slow down, inflation is following suit as core inflation drifted below 2 percent in June, but the Fed likes to see levels between the 1 and 2 percent range. Many analysts believe that the Fed will keep rates steady for the rest of the year to help moderate and keep inflation under control.
If growth and inflation are unable to remain at suitable levels, and the problems within the housing and subprime sectors rebound soon, the Fed may actually have to look at reducing rates a quarter of a percent by the end of the year to help keep inflation under control.
Today a government report showed that productivity rose at an annual rate of 1.8 percent in the second quarter, which was less than the 2 percent gain that was expected. Labor costs rose more than expected today to 2.1 percent, which might help drive inflation as the labor cost increases while the growth of production is showing signs of slowing down.
The market volatility continued today in early morning trading as the Dow and S&P were down, but each rose sharply prior to the Fed’s announcement. After the announcement, the Dow, S&P and Nasdaq are back in the red for today’s trading. The Dow is sitting at 13,365.95, which is down almost 103 points as of 1:45 pm CDT. All of the large indices are in line with drops near the 1 percent mark.
The volatility in the market isn’t as big of a concern as inflation, but the problems in the subprime mortgage and credit markets still exhibit a problem. Tuesday marked the ninth consecutive meeting where the Fed has kept the rates steady, and this is coming after 17 straight meetings of quarter percentage rate hikes. This leaves business and consumer lending rates from banks steady at 8.25 percent, as banks like to keep its rate 3 points higher than the fed.
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