Fed Leaves Rate Untouched, Disregards Credit Market Tumult

Includes: AGG, DIA, IVV, QQQ, SPY
by: Jonathan Liss

For the ninth time in a row, the Fed voted unanimously to hold its target rate steady at 5.25%. The Fed also held the prime bank lending rate at 8.25%, where it has been for the last year. After the statement, the S&P 500 index dropped from an intraday high of 1476.45 to a low of 1457.07 (-1.3%) before rebounding to close at 1476.71. In a nod to recent volatility, the Fed's statement acknowledged that "financial markets have been volatile in recent weeks" and that "credit conditions have become tighter." However, the Fed reiterated its belief that moderate economic growth will continue forward despite continuing subprime fallout and an ensuing credit crunch, and that it believes the economy's "predominant policy concern remains the risk that inflation will fail to moderate as expected." The Fed concluded that future rate decisions would be predicated on "the outlook for both inflation and economic growth" - which many economists understood to mean a near-term rate cut was unlikely.

Sources: FOMC Statement, AP, MarketWatch, Wall Street Journal
Commentary: Fed's History of Acknowledging Risks [WSJ blog] • Market Stress: It's All About PerspectiveWhy The Fed Won't Cut Today
Stocks/ETFs to watch: SPY, IVV, DIA, QQQQ, AGG

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