Fed Leaves Rate Unchanged At 5.25%

The Federal Reserve on Tuesday said inflation remains its primary concern but acknowledged risks of slower economic growth, suggesting it is starting to recognize the potential for subprime mortgage woes and broader credit market turmoil to hamper growth.

That could pave the way for a neutral risk assessment when the Fed meets next month if economic data continue to point to a sluggish economy and contained price pressures. Some on Wall Street have clamored for a rate cut to address housing and credit market concerns, although that seems unlikely in the near term. The Federal Open Market Committee, as universally expected, voted unanimously to hold the federal funds rate at 5.25%. It has stood there since June of last year, a period encompassing nine FOMC meetings. "Downside risks to growth have increased somewhat," the Fed said in a statement, though inflation remains the "predominant" concern. Previously, it had not referred to downside growth risks. "Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing," the Fed added in new language to its statement. Still, while inflation has improved "modestly," the Fed repeated that a "sustained moderation" hasn't been "convincingly demonstrated." Core inflation has edged lower since the start of the year, with the Fed's preferred gauge - the price index for personal consumption expenditures excluding food and energy - running at a 1.9% annual rate through June. It was as high as 2.5% in February. The Fed doesn't have an official inflation target, but has long been assumed to have a comfort zone between 1% and 2% for core PCE. Some firms had predicted the Fed would go further and adopt a neutral stance on growth and inflation risks amid signs of turmoil in credit markets. But that seemed a long shot. Fed Chairman Ben Bernanke repeated the Fed's inflation concerns three weeks ago when he testified to Congress. As recently as Thursday, when credit concerns were front-and-center, Fed Governor Randall Kroszner told lawmakers that economic fundamentals were "unchanged" from when Bernanke testified. Officials on Tuesday repeated that high resource utilization, a nod to the tight employment market, remains an inflation risk. In the minutes of their June meeting released last month with the usual three-week lag, officials also cited elevated energy and commodity prices, slower productivity and the declining value of the dollar. All three are likely still factors even though they weren't mentioned in Tuesday's statement. In fact, the government on Tuesday revised down its productivity estimates going back to 2004, suggesting the underlying trend has weakened. The Fed repeated its forecast for "moderate" economic growth in the months ahead. However, recent data suggest some risks to that outlook. Weaker-than-expected purchasing manager surveys and automobile sales for July as well as a report that only 92,000 new jobs were added last month suggest growth may only be around 2% this quarter. Officials have come under sharp criticism from members of Congress over the Fed's repeated contention that problems in the subprime mortgage sector haven't spread beyond housing. Senate Banking Committee Chairman Christopher Dodd, D-Conn., last week called such assertions "breathtaking."