Despite Uncertainty, Fed Leaves Key Rate Unchanged

In the midst of historic upheaval in the nation’s financial markets, the Federal Reserve elected to leave a key rate unchanged, but left the door open for a future cut to the federal funds target rate before this year is out. Markets responded little to the Fed’s announcement, focusing instead on the fate of troubled insurer American International Group, Inc. (AIG). “Strains in financial markets have increased significantly and labor markets have weakened further,” the Fed statement read. “Economic growth appears to have slowed recently, partly reflecting a softening of household spending.” Read the full Fed statement. Subtle shifts in the Fed statement reflected increasing concern at the Fed about growth risks, while language referring to inflation was clearly de-emphasized. This particular Fed meeting saw the move to leave the rate unchanged agreed to unanimously by the Federal Reserve Board of Governors; last time, Dallas Fed president Richard Fisher dissented in favor of raising rates. Analysts had predicted as recently as last week that the Fed’s next move would be to raise the target rate, sometime early next year. But that was before a historic failure of Lehman Brothers Holdings Inc. (LEH), and the sale of Merrill Lynch & Co. (MER) to Bank of America Corp. (BAC), and before AIG teetered on the brink of bankruptcy. The Fed refused to put money on the table to help Lehman, although reports were emerging Tuesday evening that the government may choose to intervene with AIG. And the weekend before saw the government take control of twin mortgage finance giants Fannie Mae (FNM) and Freddie Mac (FRE) — a historic past eight days for the financial and mortgage markets. As a result, most analysts now expect to see a further rate cut before this year is out, although market sentiment is decidedly mixed as to whether a rate cut would help the market. In particular, lower rates aren’t necessarily going to entice lending activity from banks that simply lack the capital to do so. “It may be psychologically nice if they want to play day games with the stock market, but why (would) they want to do that?” George Feiger, chief executive at Contango Capital Advisors in Berkeley, California, told Reuters in a report. Disclosure: The author held no relevant positions when this story was published; indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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