Federal Reserve Holds Interest Rates Steady

The Federal Reserve left short-term interest rates unchanged for the second consecutive month, but held out the possibility that its two-year campaign to raise rates may just be on pause.

“Inflation pressures seem likely to moderate over time,” the Federal Open Market Committee said in a statement explaining its decision, which was made behind closed doors today.

The Fed used identical language on August 8 when it declined for the first time since mid-2004 to raise short-term rates by 0.25 percentage points.

For 17 consecutive meetings before that one, the committee had added 0.25 percentage points to the federal funds rate, which banks charge each other for overnight loans. In turn, Florida mortgage rates have dropped off in recent weeks after steadily climbing for the better part of a year.

The Fed’s action was expected, but somewhat disappointed financial markets, which hoped for a signal that the campaign to raise interest rates might be officially over, and that the next step might be to reduce rates in the interest of generating economic growth.

Analysts said the economy’s immediate future depended heavily on whether the housing market decline results in a bumpy landing or a hard landing. A soft landing, they said, is no longer possible.

“This is a tough time for the Fed. They have to balance the risk of a hard landing for the housing market against the risk that inflation continues to rise,” said Ethan Harris, chief U.S. economist for Lehman Brothers.

Former Fed Chairman Alan Greenspan, who retired earlier this year, allowed the housing market to soar out of control by keeping rates at historically low levels for so long after the shock of the Sept. 11, 2001 terrorist attacks, Harris said, adding that Greenspan’s successor, Ben S. Bernanke, inherited that problem.

“People have been borrowing against the value of their homes and the home building industry has been booming. Together, these were fueling growth and now they’re going in reverse,” Harris noted, raising fears that a cooling market could slow overall U.S. economic growth by 1 percent.

Experts believe that the next move in interest rates would be upward. The housing market may show signs of hitting bottom by the end of the year, he said, but inflation will creep upward. It’s too early to declare victory over inflation, and for those seeking Florida home mortgage loans, that can make all the difference.