Fed keeps short-term interest rates unchanged

By: Holden Lewis • Bankrate.com

Short-term interest rates remain unchanged as honchos in the Federal Reserve try to figure out which is the greater danger: inflation or recession.

The central bank's Federal Open Market Committee left the target for the federal funds rate at 2 percent, as expected. The prime rate will remain 5 percent. Most home equity lines of credit and variable-rate credit cards are based on the prime rate, and their rates will not change.
The rate-setting committee meets eight times a year. In the previous seven meetings dating back to last summer, the panel cut rates. The reduction in the federal funds rate was unusually rapid, going from 5.25 percent in September to 2 percent in April, as the Fed fought off a credit crunch.

With the economy in a slump, and with prices rising rapidly, the Fed has found itself in a dilemma. Short-term rates already are low, and if the central bank cuts them more to stimulate economic growth, then prices could rise even faster and get out of control. If the Fed raises short-term rates, the result could be a recession (or a deeper recession, if the economy already is in one) and a delayed recovery.

All this in an election year.

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