Despite serious turmoil on Wall Street in recent weeks, the Federal Reserve made the decision to hold the benchmark interest rate steady at 2 percent.
Though lowering the interest rate is often regarded as an effective way to ease the credit market, a lower rate can also affect inflation.
The high consumer prices plaguing the economy since the price of oilspiked earlier in the year have raised concerns over inflation. Undercertain conditions, stagnant growth coupled with very low interestrates can worsen the economic situation.
"The financial markets aren't frozen because the federal funds rateis too high," Michael T. Darda, chief economist at MKM Partners, tells the New York Times. "The markets are frozen because there is a crisis of confidence. It's not a matter of whether the short rate is 2 percent or 1.5 percent."
In addition, rates are relatively low by historic standards. They have been over 2 percent since early 2005, and remained over 5 percentfor much of 2006 and 2007. The Fed began a series of cuts early in theyear to stimulate a flagging economy.
The New York Times reports that since January, over 600,000 jobs have been lost and the unemployment rate is over 6 percent. Due to concerns over the general health of the economy, in particular related to the stability of several major financial institutions, the Fed did not rule out the possibility of a rate cut in the future.
For the time being, however, worries over inflation are superseding concerns related to the economy's stagnant growth.
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--Bridget O'Sullivan
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