Fed opts to hold interest rates steady

WASHINGTON — Federal Reserve policymakers held a key interest rate steady Wednesday, saying they expect the economy to grow moderately in coming months despite the housing slump.

In an important change, Fed policymakers got rid of language from previous policy statements that suggested their next move could be a rate increase. Instead, the Fed is now widening its options and raising the possibility that rates also could go down.

The major U.S. stock indexes mounted a strong rally on the news, with the Dow Jones industrial average jumping 159 points Wednesday.

The central bankers, in a statement released after their two-day meeting, noted that inflation had picked up recently, and said they remain more worried about price pressures than about the economy's strength.

The Fed forecasts inflation to drift lower over time, but said its "predominant policy concern remains the risk that inflation will fail to moderate as expected."

Instead of referring to the possibility of further rate increases, the Fed statement said "future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth." Many investors read that as a sign that the central bank might be as likely to cut interest rates as raise them in coming months.

The Fed's top policymaking committee voted unanimously to leave its overnight rate at 5.25 percent, where it has been since June. The rate influences many other short-term rates, such as those on credit cards and home-equity loans.

Long-term interest rates, such as those on mortgages, are determined by global capital markets. Those rates have fallen in recent weeks. The rate on a 30-year-mortgage, for example, averaged 6.14 percent last week, down from 6.30 percent a month earlier, according to mortgage company Freddie Mac.

Some investors had hoped the Fed might hint at the possibility of cutting short-term interest rates to soothe financial markets roiled in recent weeks by upheaval in the mortgage industry.

But central bank policymakers apparently see no reason to lower their benchmark rate when mortgage rates are already falling and businesses still find cheap credit abundantly available.

Moreover, lowering borrowing costs might spur inflation — the last thing the Fed wants to do when price increases are already uncomfortably high.

Inflation has fluctuated in recent months along with oil prices. After stripping out volatile food and energy prices, so-called core consumer prices rose 2.7 percent in the year ended in February, the Labor Department said Friday. That's better than the recent peak of 2.9 percent annual rate in September, but still too high for the Fed.

Fed policymakers are forecasting inflation to drift lower over time, as a cooler economy makes it harder for businesses to raise prices. If the economy softens a little more, that would make the Fed's job easier by lowering price pressures. But they also don't want the economy to weaken too much and slide into a recession.

Washington Post reporter Bill Brubaker and The Associated Press contributed to this report.