The Federal Reserve, the United States central bank, resisted pressure this week to cut interest rates to ease the turmoil sweeping the world’s credit markets.
After its latest meeting the Fed’s open market committee, headed by Ben Bernanke, left its key interest rate steady at 5,25%, the level that has prevailed since June last year.
The committee issued a statement saying it was aware credit conditions had tightened for households and businesses and that financial markets had become more volatile, but that its main concern remained inflation.
There had been growing speculation in financial markets that the crisis in the US “sub-prime” mortgage market — lending to those with patchy credit records — could encourage the Fed to ease policy later this year. The crisis has affected a number of banks around the world.
But after one rate-setting committee member, William Poole, had said last week it was no more than a “typical market upset”, few analysts had really expected the Fed to move this time, especially as early signs are emerging that the country’s embattled housing market could be past the worst.
In recent days investment bank Bear Stearns has admitted it lost $1,5-billion in the mortgage-backed bond market, while a lender called American Home Mortgage has gone bankrupt. House prices have been falling for some time in the US and home building has collapsed.
Many analysts say that with unemployment low and exports benefiting from the weak dollar, the non-housing fundamentals of the world’s number one economy remain sound.
Thus, they argue, the Fed has no immediate need to cut interest rates unless it becomes apparent that problems in the credit markets are causing wider economic damage. — Â