Interest rates stay put, for now

Fed hints that cut could come later

NEW YORK -- Wall Street took a step back from the ledge Tuesday, with the Federal Reserve resisting a cut in interest rates and the stock market staging a small rebound one day after a stomach-churning drop.

Investors kept a nervous eye on American International Group, the world's largest insurer, but word came late Tuesday that the U.S. government had worked out a plan to stave off a failure that would create even more financial turmoil.

Fed Chairman Ben Bernanke and his colleagues, in their first unanimous decision this year, kept the closely watched federal funds rate unchanged at 2 percent -- but noted that strains on the market have "increased significantly." Fed officials hinted they stood ready to lower rates if needed.

Stocks slumped immediately after the Fed announcement, with the Dow Jones industrial average dropping about 100 points. But the Dow finished the day up 141 points, and back over 11,000.

It was a breather from the chaos that shook the financial system Monday, when investment house Lehman Brothers declared bankruptcy and the Dow suffered its biggest point drop since the Sept. 11, 2001, terrorist attacks.

Wreckage on Wall Street in recent days did not force the Fed -- as some thought possible -- to reverse course and cut rates.

The prime lending rate for millions of consumers and businesses stayed at 5 percent. The prime rate applies to certain credit cards, home equity lines of credit and other loans. The Fed's key rate and the prime rate are at four-year lows.

The Fed's view of economic and financial conditions, however, was more dour than its last assessment in early August. Economic growth appears to be slowing as consumers hunker down and export growth cools off a bit, Fed policymakers said.

The more bearish tone indicates that the Fed is again open to rate cuts down the road, some analysts suggested.

"The Fed has opened the door to a rate cut that many thought was closed," said Stuart Hoffman, chief economist at PNC Financial Services Group. "I think there was more emphasis about the economy being weak."

In recent days, the U.S. financial system has suffered its worst shakeout since the Great Depression as bad bets on dodgy mortgage-backed securities claimed more Wall Street giants.

In addition to Lehman's bankruptcy, a weakened Merrill Lynch agreed to a bailout by Bank of America, based in Charlotte.

But even with the turmoil, some argued that a rate cut probably wouldn't do much to turn around worried consumers and bolster the economy. Others feared another rate cut could send a wrong message to financial companies that made bad bets.

"I think we're beyond the point where the Fed can do much about this," said Timothy A. Canova, professor of international economic law at the Chapman University School of Law in Orange, Calif.

Urgently trying to keep cash flowing amid a Wall Street meltdown, the Fed also pumped another $70 billion into the nation's financial system to help ease credit stresses.

To say that it is an unusual time in U.S. finance would be an understatement.

On Tuesday, the Web site Christianity Today posted an e-mail message from an evangelical leader asking Christians to pray for Wall Street.

"We may find it hard to pray for these bankers because they are insanely wealthy, true," it read. "A few of them can be terribly arrogant; and some can have little heart for the less wealthy. Yet, Jesus prayed for the rotten because he loved the rotten. In this situation, prayer could accompany a revival of the heart on Wall Street."