Fed Holds Rate at 2% As Growth Stagnates

The Federal Reserve kept its benchmark interest rate at 2% and signaled that weak employment and financial instability will delay any increase in borrowing costs.

"Labor markets have softened further" the Federal Open Market Committee said in a statement yesterday in Washington. "Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth."

Stocks extended gains on speculation that policy makers will leave the rate unchanged in coming months. Officials said they still expect inflation to slow, while acknowledging that the outlook for prices is "highly uncertain."

"This says the Fed is on the hold for the rest of the year," a chief economist at Wachovia Corp. in Charlotte, N.C., and a former chief economist at the Senate Banking Committee, John Silvia, said. "The next move may be up, but it won't occur for a while."

The president of the Dallas Fed, Richard Fisher, dissented for a fifth time this year, preferring an increase.

"Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the committee," the statement said.