Fed Leaves Short-Term Rates at 5.25%

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The Fed has left short-term interest rates unchanged at 5.25% for the fourth consecutive time, and has reiterated its belief that inflation is the greatest threat to the country's economy. Ten-year Treasuries rose and the yield fell, indicating that bond traders believe the Fed is succeeding at containing inflation. Though traders in the Fed funds market are betting that rates will be cut in the relatively near future, many economists believe the economy will have to weaken much more before the Fed takes that step. In August, the Fed took a breather after two years of rate increases in the belief that the slowing economy would keep inflation under control -- a gamble that seems to have paid off, as prices have indeed come down since then. Still, growth might slow too abruptly for such a strategy, due to what Fed Chairman Ben Bernanke terms the "substantial" housing slowdown (among other factors). If that occurs, a rate cut is likely. The economy has already slowed to 2.2% in the third quarter, in sharp contrast to the 5.6% figure posted in the first quarter.
• Sources: New York Times, Business Week, Bloomberg, Wall Street Journal
• Related commentary: Key Word From the Fed Statement: 'Substantial', Bernanke Sounds Positive, Yet Cautious Note on the Economy, CPI Report Should Calm Bernanke's Inflation Concerns, Bernanke Comments Reinforce Stable Interest Rates View
• Potentially impacted ETFs: Total Stock Market VIPERs (NYSEARCA:VTI), Standard & Poor's 500 Index Depository Receipts (NYSEARCA:SPY), DIAMONDS Trust (NYSEARCA:DIA), iShares S & P 500 (NYSEARCA:IVV)

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