Fed Keeps Rate at 5.25%, Inflation Is Main Concern

Forex outlook:

The Federal Reserve, keeping interest rates unchanged, said inflation is still the biggest danger to the economy while acknowledging that the expansion may slow. ``Although the downside risks to growth have increased somewhat, the committee's predominant policy concern remains the risk that inflation will fail to moderate as expected,'' the Federal Open Market Committee said today after meeting in Washington, where it left the benchmark rate at 5.25 percent.

Some investors read the remarks to mean that Chairman Ben S. Bernanke won't rush to cut rates in response to a rout in the sub prime mortgage market that's led to stricter lending standards for companies and consumers. Several economists predicted the Fed would say risks were balanced between prices and slacker growth, foreshadowing a possible rate reduction. ``Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing,'' the Fed said. ``Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.''

Traders pared bets on the chance of the central bank lowering rates in the next few months, according to futures prices on the Chicago Board of Trade. The Dow Jones Industrial Average fell in the minutes after the decision, before rebounding. ``I don't think the Fed gave the market anything like it wanted to hear,'' said David M. Jones, chief executive officer of DMJ Advisors in Denver and a former Fed economist. ``The Bernanke Fed is marching to its own drummer.'' ``A sustained moderation in inflation pressures has yet to be convincingly demonstrated,'' the FOMC said, repeating a sentence from the last statement on June 28. The mention of inflation as the ``predominant'' concern has appeared in each Fed statement since March and meeting minutes starting with last December's session. The Fed statement comes less than three weeks after Bernanke delivered semiannual testimony to Congress, an event that usually sets the tone of central bank discussions for several months. He told lawmakers on July 18 and 19 that U.S. economic growth would pick up ``a bit'' and inflation recede. The Fed may be reluctant to reduce its benchmark interest rate, though, unless officials see inflation as under control.

Gold: Gold fell in New York on speculation the euros rally against the dollar will stall, reducing the appeal of the precious metal as an alternative investment. Gold generally moves in the same direction as the euro, which has fallen 0.8 percent since reaching a record on July 24. Gold has gained 6.9 percent this year while the euro had climbed 4.2 percent against the dollar. ``Gold's been pegged to the euro,'' said Frank McGhee, head metals trader at Integrated Brokerage Services LLC in Chicago. ``It's following what the euro can do and the euro can sit here in a range for three or four years.'' Interest-rate futures show traders see a 52 percent chance the Fed will lower its key interest rate a quarter-percentage point to 5 percent in October, down from 74 percent yesterday and up from 5.9 percent a month ago. Merrill Lynch & Co. yesterday said the Fed will cut rates in October. ``If the Fed cuts rates, gold shoots up,'' said Michael Darda, chief economist at MKM Partners LP. ``If the Fed stays put, gold moves sideways. If they raise rates, then it would be a headwind for gold. The question for investors is how hawkish Bernanke is going to be?''

Crude Oil: Crude oil was little changed, close to a one-month low in New York, a day before the release of a government report that will probably show a third straight week of increases in U.S. gasoline inventories. The Energy Department report will show supplies gained 800,000 barrels, according to the median of 11 estimates in a Bloomberg News survey of analysts. Oil supplies probably fell as refineries processed crude to make fuel. U.S. gasoline demand typically declines in September as people reduce vacation travel. ``Labor Day is right around the corner,'' said Andy Lipow, president of Lipow Oil Associates LLC, a consulting company based in Houston. ``So I would say we are going to make it through this gasoline season.'' ``We have seen a technical reaction after reaching a new all-time-high,'' said Dora Borbely, an economist at DekaBank Deutsche Girozentrale in Frankfurt. ``I see support at around $70. The correction should come to an end around $70. I don't see prices below $70 in the month of August.'' Oil supplies probably dropped 2.5 million barrels last week, the survey showed. Refineries operated at 93.6 percent capacity, equal to the prior week when they ran at their highest rate in more than a year. 

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