The Federal Reserve (Fed) kept U.S. interests unchanged Tuesday, choosing to calm nervous financial markets with central bank lending rather than with monetary policy, despite the fact that it acknowledged that strains in financial markets have “increased significantly.” The central bank said it was worried about both U.S. economic weakness, which could have been helped with an interest-rate cut, and price pressures, which would have increased with a rate reduction. The Fed's unanimous decision leaves the key overnight federal funds rate at 2 percent, where it has been since April. “Strains in financial markets have increased significantly, and labor markets have weakened further,” the central bank said in a statement announcing its decision. “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.” However, the Fed said already-low interest rates and steps the central bank has taken to ease funding strains in credit markets should help economic growth in the medium term. On the other hand, the Fed said it also remained concerned about inflation pressures. “The downside risks to growth and the upside risks to inflation are both of significant concern,” the central bank said, surprising many in financial markets who had expected to the Fed to signal greater concerns about growth. The Fed's action was a disappointment to investors who were hoping that severe stress in financial markets that intensified in recent days would prompt the central bank to resume reducing interest rates. Investors had started to speculate this week that the Fed would lower rates following the bankruptcy of 158-year-old Lehman Brothers investment bank, the quick sale of Merrill Lynch brokerage to Bank of America, and the search for cash by insurer American International Group (AIG). Such quickly moving financial developments have unnerved global markets and threaten to worsen a credit crisis that already has helped push the U.S. economy toward recession. On Sunday, the Fed said it would accept a wider range of collateral, including stocks, from investment banks seeking central-bank loans in an effort to help keep markets functioning.
