Fed Keeps Rate at 2%, Rebuffing Call for Reduction (Update2)
By Scott Lanman and Craig Torres
Sept. 16 (Bloomberg) -- The Federal Reserve left its main interest rate at 2 percent, rebuffing calls by some investors for a cut after Lehman Brothers Holdings Inc.'s bankruptcy shook markets worldwide.
``Downside risks to growth and the upside risk to inflation are both of significant concern,'' the Federal Open Market Committee said in a statement in Washington. ``The committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.''
Chairman Ben S. Bernanke and his colleagues noted that financial strains have ``increased significantly,'' signaling that they will continue to address the turmoil with emergency lending and aim monetary policy at a longer-term economic forecast.
Stocks initially fell after the decision, then rallied after a report that the central bank is considering a loan to American International Group Inc. That would be a shift from yesterday, when officials were inclined against providing funds.
``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,'' the FOMC statement said. ``Over time, the substantial easing of monetary policy combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.''
Vote Tally
The decision was unanimous, the first such agreement in a year.
``The committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain,'' the Fed said.
New York Fed President Timothy Geithner didn't come to Washington today for the meeting, staying in New York, where talks continue at his bank on the crisis at AIG, which has slid 78 percent in the past week.
The Fed is considering a ``loan package'' to AIG, a person familiar with the negotiations said. Two people familiar with the situation yesterday said the New York-based insurer was seeking $70 billion to $75 billion in loans arranged by private banks.
Futures traders had put an 80 percent chance on at least a quarter-point rate cut today. Three months ago, they saw a 100 percent chance of an increase.
Stock Market
The Fed held rates steady even after the Standard & Poor's 500 Index dropped 4.7 percent yesterday to the lowest level since October 2005. The index was up 1.1 percent at 1,205.69 at 3:06 p.m. in New York.
Rate cuts totaling 3.25 percentage points in the past year and emergency Fed loan programs have failed to revive lending among banks.
``We have a very concentrated problem in housing that's not really a rate problem, and we've got a financial crisis that's really not a rate problem,'' former Dallas Fed President Robert McTeer said in an interview with Bloomberg Radio before the decision. ``I don't think we have a generally weak economy that needs lower rates.''
Bernanke and Treasury Secretary Henry Paulson refused to offer federal aid to Lehman after its stock plunged last week, pushing the 158-year-old company into bankruptcy early yesterday.
Merrill Lynch & Co. became engulfed by the turmoil, agreeing to a quick merger with Bank of America Corp. this week, while insurer AIG struggled to stave off collapse after its credit ratings were cut.
Global Losses
The rout sparked by the collapse of the U.S. subprime mortgage market has cost financial institutions worldwide $515 billion in writedowns and losses since the start of 2007. Firms have raised $362 billion of capital in response.
The New York Fed injected $70 billion of temporary reserves into the banking system today and $70 billion yesterday, the most since the September 2001 terrorist attacks. The central bank has also provided billions of dollars through direct loans of cash and Treasuries, and widened on Sept. 14 widened the collateral accepted for loans to securities firms to include equities.
Still, banks are driving up short-term lending rates on concern AIG will follow Lehman into bankruptcy and leave financial institutions with losses on $441 billion of credit derivatives issued by the biggest U.S. insurer. Central banks around the world pumped more than $210 billion into the financial system as they sought to alleviate the credit-market seizure.
The cost of borrowing in dollars overnight more than doubled to the highest since 2001. The overnight dollar rate soared 3.33 percentage points to 6.44 percent today, its biggest jump in at least seven years, according to the British Bankers' Association. The rate was as low as 2.07 percent in June.
Commodity Prices
Tumbling commodity prices, including a 38 percent decline in crude oil from a July 11 peak, ease pressure on the Fed to fight against inflation. The consumer price index fell 0.1 percent in August, the Labor Department said today. So-called core prices, which exclude food and energy, rose 0.2 percent after a 0.3 percent gain in July.
Lehman's bankruptcy filing came amid signs that losses at financial institutions are impeding U.S. economic growth.
The economy will slow to a 1.2 percent annual growth rate, or less than half the prior quarter's pace, as consumer spending, the biggest part of the economy, stalls this quarter, according to a Bloomberg survey from Sept. 2 to Sept. 9.
The decline in consumer spending prompted automakers last month to reduce car output by 12 percent, or the most in a decade, Fed figures showed yesterday. Industrial production in the U.S. fell by 1.1 percent, or the most in almost three years.
Unemployment rose to a five-year high of 6.1 percent in August and foreclosure filings rose to a record as falling home prices frustrated homeowners' efforts to sell or refinance their homes, RealtyTrac Inc. said.
``Downside risks to growth have risen significantly,'' Robert DiClemente, chief U.S. economist for Citigroup Global Markets said yesterday in a note to clients in which he predicted a half-point cut. ``Conditions remain hostile to a sustained restoration of economic growth.''
To contact the reporter on this story: Scott Lanman in Washington at [email protected]
Last Updated: September 16, 2008 15:08 EDT
By Scott Lanman and Craig Torres
Sept. 16 (Bloomberg) -- The Federal Reserve left its main interest rate at 2 percent, rebuffing calls by some investors for a cut after Lehman Brothers Holdings Inc.'s bankruptcy shook markets worldwide.
``Downside risks to growth and the upside risk to inflation are both of significant concern,'' the Federal Open Market Committee said in a statement in Washington. ``The committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.''
Chairman Ben S. Bernanke and his colleagues noted that financial strains have ``increased significantly,'' signaling that they will continue to address the turmoil with emergency lending and aim monetary policy at a longer-term economic forecast.
Stocks initially fell after the decision, then rallied after a report that the central bank is considering a loan to American International Group Inc. That would be a shift from yesterday, when officials were inclined against providing funds.
``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,'' the FOMC statement said. ``Over time, the substantial easing of monetary policy combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.''
Vote Tally
The decision was unanimous, the first such agreement in a year.
``The committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain,'' the Fed said.
New York Fed President Timothy Geithner didn't come to Washington today for the meeting, staying in New York, where talks continue at his bank on the crisis at AIG, which has slid 78 percent in the past week.
The Fed is considering a ``loan package'' to AIG, a person familiar with the negotiations said. Two people familiar with the situation yesterday said the New York-based insurer was seeking $70 billion to $75 billion in loans arranged by private banks.
Futures traders had put an 80 percent chance on at least a quarter-point rate cut today. Three months ago, they saw a 100 percent chance of an increase.
Stock Market
The Fed held rates steady even after the Standard & Poor's 500 Index dropped 4.7 percent yesterday to the lowest level since October 2005. The index was up 1.1 percent at 1,205.69 at 3:06 p.m. in New York.
Rate cuts totaling 3.25 percentage points in the past year and emergency Fed loan programs have failed to revive lending among banks.
``We have a very concentrated problem in housing that's not really a rate problem, and we've got a financial crisis that's really not a rate problem,'' former Dallas Fed President Robert McTeer said in an interview with Bloomberg Radio before the decision. ``I don't think we have a generally weak economy that needs lower rates.''
Bernanke and Treasury Secretary Henry Paulson refused to offer federal aid to Lehman after its stock plunged last week, pushing the 158-year-old company into bankruptcy early yesterday.
Merrill Lynch & Co. became engulfed by the turmoil, agreeing to a quick merger with Bank of America Corp. this week, while insurer AIG struggled to stave off collapse after its credit ratings were cut.
Global Losses
The rout sparked by the collapse of the U.S. subprime mortgage market has cost financial institutions worldwide $515 billion in writedowns and losses since the start of 2007. Firms have raised $362 billion of capital in response.
The New York Fed injected $70 billion of temporary reserves into the banking system today and $70 billion yesterday, the most since the September 2001 terrorist attacks. The central bank has also provided billions of dollars through direct loans of cash and Treasuries, and widened on Sept. 14 widened the collateral accepted for loans to securities firms to include equities.
Still, banks are driving up short-term lending rates on concern AIG will follow Lehman into bankruptcy and leave financial institutions with losses on $441 billion of credit derivatives issued by the biggest U.S. insurer. Central banks around the world pumped more than $210 billion into the financial system as they sought to alleviate the credit-market seizure.
The cost of borrowing in dollars overnight more than doubled to the highest since 2001. The overnight dollar rate soared 3.33 percentage points to 6.44 percent today, its biggest jump in at least seven years, according to the British Bankers' Association. The rate was as low as 2.07 percent in June.
Commodity Prices
Tumbling commodity prices, including a 38 percent decline in crude oil from a July 11 peak, ease pressure on the Fed to fight against inflation. The consumer price index fell 0.1 percent in August, the Labor Department said today. So-called core prices, which exclude food and energy, rose 0.2 percent after a 0.3 percent gain in July.
Lehman's bankruptcy filing came amid signs that losses at financial institutions are impeding U.S. economic growth.
The economy will slow to a 1.2 percent annual growth rate, or less than half the prior quarter's pace, as consumer spending, the biggest part of the economy, stalls this quarter, according to a Bloomberg survey from Sept. 2 to Sept. 9.
The decline in consumer spending prompted automakers last month to reduce car output by 12 percent, or the most in a decade, Fed figures showed yesterday. Industrial production in the U.S. fell by 1.1 percent, or the most in almost three years.
Unemployment rose to a five-year high of 6.1 percent in August and foreclosure filings rose to a record as falling home prices frustrated homeowners' efforts to sell or refinance their homes, RealtyTrac Inc. said.
``Downside risks to growth have risen significantly,'' Robert DiClemente, chief U.S. economist for Citigroup Global Markets said yesterday in a note to clients in which he predicted a half-point cut. ``Conditions remain hostile to a sustained restoration of economic growth.''
To contact the reporter on this story: Scott Lanman in Washington at [email protected]
Last Updated: September 16, 2008 15:08 EDT
