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Fed Leaves Key Interest Rate Unchanged

Cites Inflation Fears amid Rising Volatility

by Martin H. Bosworth
ConsumerAffairs.com

August 7, 2007

While the Fed cited increasing volatility in the market due to credit problems and the housing slump, their prime concern continues to be preventing inflation pressures from increasing.

"Readings on core inflation have improved modestly in recent months," the Fed said in its statement. "However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures."

The Fed decision means the "prime" lending rate will stay at 8.25 percent for credit card debt and other forms of revolving loans. Stocks seesawed in the wake of the Fed announcement, with investors expressing general confidence in the Fed's course after initial concerns caused the market to dip.

The Fed under current chairman Ben Bernanke has been walking a tightrope between cutting interest rates in order to spur more lending, or raising them to appease Wall Street. The collapse of the subprime lending sector has led to bigger problems in the overall market, making lenders much more skittish about offering credit, and trapping cash-strapped homeowners in houses they can no longer afford.

Subprime loans are frequently targeted at first-time minority buyers, and were mostly refinances designed to cajole owners to extract equity from their homes. The end result is homes worth less than what the buyers paid for them, and owners unable to cope with sudden adjustments to their interest rates.

Foreclosures have hit record highs in recent months, with RealtyTrac recording 925,986 foreclosure filings in the first six months of 2007 alone. The collapse has also led to the bankruptcy or dissolution of numerous subprime lending houses, American Home Mortgage being the latest.

It's not just the lenders and the homeowners being caught in the collapse's wake--industries from home construction companies to hedge funds are feeling the pain. Warren Spector, former co-president of Bear Stearns Asset Management, resigned on August 5 in the wake of the company's struggle to keep its collapsing hedge funds afloat.

Bernanke recently admitted in testimony before Congress that the housing slump would drag down overall economic growth, though he stressed growth would continue, albeit at a slower pace.

Bernanke has also called for stronger oversight and guidance of mortgage lenders to prevent another subprime crisis from happening.

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