In a Shift, Fed Signals Concern Over Deflation --- Central Bank Leaves Rates Unchanged, but It Cites Possible `Fall in Inflation'
WASHINGTON -- The Federal Reserve left interest rates unchanged. But in a profound shift from half a century of preoccupation with fighting inflation, the central bank signaled that it may cut interest rates later to ward off even the possibility of deflation.</br></br>Over the next few quarters, the Fed said in a statement, "the probability of an unwelcome substantial fall in inflation, though minor, exceeds that of a pickup in inflation from its already low level."</br></br>The words suggest that even if the Fed doesn't cut interest rates soon, it will keep them low for a long time. That realization helped send bond yields sharply lower and drove the dollar to a multiyear low against the euro. Stocks initially sold off but ended the day higher. Futures markets -- which can provide an indication of what investors believe will occur weeks, or even months, from now -- put the odds of a quarter-percentage-point cut by August at about 75%.</br></br>The Fed statement, termed "masterful" by Goldman Sachs economists, cheered the bond market by suggesting that the central bank is a long way from raising rates, without spooking the stock market.</br></br>The central bank kept its target for the federal-funds rate, charged on overnight loans between banks, at 1.25%, as widely expected.