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US Fed holds key interest rate steady at 2%

(Agencies)
Updated: 2008-06-26 09:51

"Labor markets have softened further and financial markets remain under considerable stress," the Fed said. "Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters."

The economy has grown at a snail's pace in recent months. And, employers have cut jobs every month so far this year. The unemployment rate jumped from 5 percent in April to 5.5 percent in May, the largest one-month increase in two decades. The unemployment rate is expected to keep on rising in the months ahead, even if economic growth improves somewhat.

Hours before the Fed's decision, the government released a report underscoring the depth of the housing slump. New-home sales fell 2.5 percent in May, while home prices were down 5.7 percent from a year earlier, the Commerce Department said.

Related readings:  Fed's rate cuts 'add to inflationary pressure'  Inflation-wary Fed looks ahead to rate increases  IMF: US economy's slowdown less than feared  US economy grows by only 0.6% in 1st quarter

Mortgage rates are rising - spurred by investors' concerns about inflation. Those higher rates spell yet more headaches for the flailing housing market.

In a string of speeches over the past few weeks, Bernanke and his colleagues have ramped up tough anti-inflation talk. They've done that to rein in inflation expectations of consumers, investors and businesses. If those groups think prices will keep on rising, they'll act in ways that can worsen inflation.

Bernanke, in a rare public utterance for a Fed chief, also has sounded a warning that the slide in the US dollar could contribute to a rise in inflation. He has sought to use words - instead of action - to bolster the dollar and try to lessen inflation pressures.

Consumer prices in the first five months of this year have risen at an annual rate of 4 percent. That's down from a 4.1 percent increase last year - the biggest jump in 17 years - but is still too high for the Fed's liking. Gasoline prices and oil prices have set a string of record highs. Gas has topped $4 a gallon, while oil prices are at $134.55 a barrel.

The Fed said it expects inflation to moderate later this year and next but said rising prices for energy, food and other commodities are a cause of concern. Those increases have made people boost their inflation expectations. Thus, "uncertainty about the inflation outlook remains high," the Fed said.

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