Fed Shifts to Worry Over Risk of Slump But Keeps Short-Term Rates Unchanged --- Markets Now Expect Cuts At the End of January As Inflation Fear Fades
WASHINGTON -- The Federal Reserve promised to throw a life preserver to the U.S., declaring that the risks of "economic weakness in the foreseeable future" exceed the risks of inflation. But it left short-term interest rates unchanged.</br></br>Financial markets now expect the Fed to begin cutting rates at the end of January, and to reduce them at least one-half percentage point by spring.</br></br>Abandoning its 19-month stance that it was primarily worried about "inflation pressures," Fed officials ended their meeting with a statement saying, "The drag on demand and profits from rising energy costs, as well as eroding consumer confidence, reports of substantial shortfalls in sales and earnings, and stress in some segments of the financial markets suggest that economic growth may be slowing further."</br></br>Although "some inflation risks persist," the Fed added, "they are diminished by the more-moderate pace of economic activity and by the absence of any indication that longer-term inflation expectations have increased." In contrast to recent Fed statements, this one included no mention of the inflationary dangers of tight labor markets.</br></br>Until a report in The Wall Street Journal this week, financial markets had expected the Fed to declare the risks of inflation and recession about equal. Even though the Fed went further than that, financial markets initially were disappointed that rates weren't cut. Stocks, which had been up before the Fed's announcement in the hopes of a rate cut, sank soon thereafter. As investors' concerns about corporate profits grow, the Dow Jones Industrial Average fell 61.05 to 10584.37, while the Nasdaq Composite Index dropped 112.81 to 2511.71, a painful 4.3% drop.