Interest rate stays put, Fed decides

Confronting inflation and slow economic growth, policymakers leave rate untouched. Stocks leap

WASHINGTON -- Confronted by rising unemployment, shaky growth, credit troubles and creeping inflation, the Federal Reserve left an important interest rate unchanged, taking a gamble that for now the best move is no move.

Fed Chairman Ben Bernanke and all but one of his central bank colleagues agreed Tuesday to leave its key rate at 2 percent.

In turn, the prime lending rate for millions of consumers and businesses remained at 5 percent. The prime rate applies to certain credit cards, home equity lines of credit and other lines.

Policymakers face dueling problems: weak economic growth and advancing inflation. Treating one risks aggravating the other. The Fed indicated that each problem poses about equal risks to the economy.

It was welcome news on Wall Street, however, where stocks put in their best showing in months on relief that the Fed's assessment of the economy and inflation wasn't worse. The Dow Jones industrials closed up 331.62 points at 11,615.77, its biggest one-day point gain since April 1.

Many economists think the Fed will leave rates where they are at its Sept. 16 meeting and through the rest of this year. This would give the economy and housing market more time to heal.

The Fed may start boosting rates early next year, economists predict. Keeping rates low for too long could worsen inflation.

Fed policymakers said that they expected inflation to improve later this year and next but that the outlook was difficult to predict.

Inflation has been high. Consumer prices in June rose at the second-fastest pace in a quarter-century. But energy prices, which marched to a record above $147 a barrel in July, have calmed down recently, giving the Fed more leeway to hold rates steady. Oil prices sank as low as $118 a barrel Tuesday, then settled at $119.17.