The Federal Reserve left interest rates unchanged yesterday at their regularly scheduled Federal Open Market Committee meeting. The decision left the benchmark Federal Funds Rate steady at 2%, making the prime rate at 5.00%. This signaled the end of interest rates cuts that started in September 2007 when prime was 8.25%. The Fed said, "Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased."
After eight months of easing rates in response to a weakening economy and financial market turmoil, the Fed has adopted a wait and see mode to assess economic conditions and inflation during the second half of this year. In the statement the Fed acknowledged that softer labor market conditions, an ongoing housing downturn and high energy prices pose downside risks to growth going forward. The committee believes that inflation will moderate over time but indicated upside risks to inflation and inflation expectations exist given rising energy and commodity prices. Therefore, the Fed’s risk assessment remains roughly balanced. Further developments will determine the timing and direction of monetary policy from here.
This morning’s May existing home sale number rose 2% to reach 4.99 million units (annual rate) as the lower housing prices started to lure buyers back into the market. The supply of homes for sale still remains about twice the level of that in a stable market.
Oil rose by more than $3 a barrel following reports that Libya may cut production and that crude oil could hit $170 a barrel this summer. Stocks tumbled after Goldman Sachs downgraded General Motors and Citibank as the market fears the credit market write downs will extend the economic slump.
