WASHINGTON — Confronted by problems at every turn — rising unemployment, shaky growth, credit troubles and creeping inflation — the Federal Reserve left an important interest rate unchanged Tuesday, taking a gamble that for now the best move was no move at all.
The next direction for rates probably is up, but that’s not likely until next year.
Fed Chairman Ben Bernanke and all but one of his central-bank colleagues agreed to leave the federal funds rate at 2 percent for the second straight meeting.
In turn, the prime lending rate for millions of consumers and businesses remained at 5 percent. The prime rate applies to certain credit cards, home-equity lines of credit and other lines.
“Although downside risks to growth remain, the upside risks to inflation are also of significant concern,” the Fed said.
Policymakers are faced with dueling problems: weak economic growth and advancing inflation. To treat one risks aggravating the other.
The Fed indicated Tuesday that each problem poses about equal risks to the economy.
Many economists believe the Fed will leave rates where they are at its next meeting Sept. 16 and through the rest of this year.
This would give the fragile economy and crippled housing market more time to heal.
The Fed may start boosting rates, now at four-year lows, early next year, economists predict. Some Wall Street investors, though, haven’t ruled out a rate increase later this year to fend off inflation. Either way, most agree the Fed’s next move will be up.
Keeping rates low for too long could worsen inflation.
“The inflation fight probably will have to wait until 2009,” said Lynn Reaser, chief economist at Bank of America’s Investment Strategies Group. “Conditions at this point do not seem to dictate an immediate tightening.”
Heightened concerns about inflation forced the Fed in June to halt a nearly year-long series of rate reductions to shore up the wobbly economy. The campaign, which started last September, was one of the most aggressive in decades. The Fed slashed its key rate by 3.25 percentage points with the hope that lower rates would spur people and businesses to buy and invest more, energizing the economy.
“Inflation has been high,” the Fed said.
Consumer prices in June rose at the second-fastest pace in a quarter century. Those high prices are a double-edged sword: They can put another damper on growth as people have less money to spend on other things, and they can force companies to raise prices for many other goods and services, spreading inflation.
One Fed member — Richard Fisher, president of the Federal Reserve Bank of Dallas, wanted to raise rates Tuesday. Fisher, who has a reputation for being extra-vigilant on inflation, was the sole opposition vote. It was the fifth time this year that he dissented.
