WASHINGTON - The Federal Reserve, caught between mounting job losses and rising inflation, held key interest rates steady today - hoping it will be enough to heal a sick economy.
The Fed seemed to believe keeping the federal funds rate, the interest that banks charge each other, at 2 percent was the best move to ease the country's economic woes.
Fed Chairman Ben Bernanke and his colleagues are being forced to navigate treacherous waters, trying to keep the economy from plunging into a deep recession while worrying about keeping interest rates so low that they could trigger a dangerous inflation spiral.
The Fed decision means that commercial banks’ prime lending rate, the benchmark for millions of consumer and business loans, will remain unchanged at 5 percent, its lowest level since late 2004.
“The Fed is really locked in right now. They can’t go forward or backward,” said Sung Won Sohn, an economics professor at the Smith School of Business at California State University Channel Islands.
Many economists believe the funds rate will remain at 2 percent not only in August but for the rest of this year.
That would mean that commercial banks’ prime lending rate, the benchmark for millions of consumer and business loans, will remain at 5 percent, its lowest level since late 2004.
The inflation pressures have come while the economy has been staggered by a prolonged housing slump that has pushed home prices down by record amounts and a severe credit crisis that has seen banks tighten lending standards sharply after billions of dollars of losses on bad mortgage loans.
The combination of a weak economy and rising inflation has raised fears of stagflation, the malady that last beset the country during the oil price shocks of the 1970s.