Fed Leaves Rates Unchanged

Updated from 2:33 p.m. EDT

The Federal Reserve kept its benchmark fed funds rate at 1.75% -- its lowest level in over 40 years and where it has been since December -- but left open the door to further cuts this year.

In its accompanying policy statement, the central bank adopted an easing bias, saying that risks are weighted toward conditions that may generate economic weakness in the near future.

"The softening in the growth of aggregate demand that emerged this spring has been prolonged in large measure by weakness in financial markets and heightened uncertainty related to problems in corporate reporting and governance," the Fed said in its statement.

The meeting's outcome was consistent with Wall Street expectations but put downward pressure on stocks. The Dow Jones Industrial Average fell about 90 points after the announcement; it was recently off 83 points. The Nasdaq swung from a 7-point gain before the news to a 9-point loss.

Some experts said the market was expecting a more aggressive policy statement. "The bias they gave the investor community was lukewarm at best," said Bob Basel, a trader at Salomon Smith Barney. "It seems like the Fed feels the policy in place is on track to do what they wanted it do."

The Fed said: "The current accommodative stance of monetary policy, coupled with still-robust underlying growth in productivity, should be sufficient to foster an improving business climate over time."

Still, fed fund futures, considered a good proxy of monetary policy, are currently pricing in 80% odds of a 25-basis-point cut in September and 100% chances of a quarter-point easing by November.

Over the past few weeks, frailty in durable goods orders, purchasing managers' surveys, consumer confidence and employment data have sparked fears the economy could go back into recession. Credit conditions remain tight, with reports saying commercial paper markets are closed to many companies.

Recent economic data have been mixed. Retail sales rose in July for the second month in a row, the Commerce Department said on Tuesday, helped in part by zero-percent financing auto deals. Last Thursday the Labor Department said weekly initial jobless claims fell to their lowest level since March.

At a forum in Texas on Tuesday to discuss recent economic weakness, President Bush said: "We are pleased with some progress but we have got more to do. The trend is in the right direction."

According to some experts, the latest economic corrosion -- the recent drop in consumer confidence, in particular -- may be the result of recent corporate scandals and thus somewhat temporary. Some experts believe that an end to the Wall Street indignities may be better for the economy than an interest rate cut.

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