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Reuters Edge

INSTANT VIEW 6-FOMC holds rates steady at 5.25 pct

NEW YORK (Reuters) - The Federal Reserve on Tuesday held benchmark U.S. interest rates steady at 5.25 percent for a ninth straight meeting and said that while downside risks to growth had risen “somewhat,” inflation remained its main concern.

The decision by the central bank’s Federal Open Market Committee keeps the overnight federal funds rate at the level it hit in June 2006 after 17 straight quarter-percentage point increases.

COMMENTS:

ANDREW KANALY, CHAIRMAN, KANALY TRUST COMPANY, HOUSTON:

“It wasn’t a hug from mom. That they said conditions are tighter for ‘some’ households, that’s telling the market to take their lumps. You’re going to get more lumps before they act. This is tough love. The market’s not down more because they haven’t really read the statement correctly, they tie it right back to inflation.

“The markets are wanting to see them do something to help out the financial sector and the Fed is saying with these utilization rates, we can’t react to just one spoke of the wheel, the rest of the economy is doing fine.”

DAVID COARD, HEAD OF FIXED INCOME SALES AND TRADING, WILLIAMS

CAPITAL GROUP, NEW YORK:

“It’s not terribly surprising. They continue to cite inflation as their overpowering concern. I know that they acknowledged that the markets have become more volatile and credit conditions have become tighter but they still believe that the economy is going to grow at a moderate pace and they are still concerned about inflation. It doesn’t look like stocks like it and with Treasuries the response also seems to be less than enthusiastic. I don’t know that it’s a big surprise. They are focused on inflation.

“They acknowledged what is going on but it doesn’t seem to bug them. They want to make it known that they are vigilant against inflation. It may be that they think the markets need to correct some excesses.”

DREW MATUS, SENIOR FINANCIAL ECONOMIST, LEHMAN BROTHERS, NEW

YORK:

“It’s actually a quite hawkish statement. The fact that they describe housing in the same way even though things have clearly gotten worse for that sector is one part of it. The second part of it is that they are clearly worried about inflation. They are talking about employment growth as solid, which suggests they don’t see the recent dip in payrolls or the rise in the unemployment rate as a trend yet. Overall they still see a very healthy economy and a very healthy labor market.”

DOUG ROBERTS, CHIEF INVESTMENT STRATEGIST, CHANNEL CAPITAL

RESEARCH, SHREWSBURY, NEW JERSEY:

“It is pretty much as expected. The key thing in the release itself is that it shows the Fed is not detached from reality -- they changed the first portion of the statement saying they understand the volatility in the market, they understand credit conditions, they understand the housing. They’re acknowledging that they see what’s going on and that they’re watching it closely.

“But this is a data-driven Fed, not a pre-emptive Fed like the Greenspan Fed was.

“They’re saying they are prepared to react, but until they see data to the contrary, they see no need to at this time.

“I think you’ll see an initial sell-off and then some stabilization. I don’t see the market falling off the cliff right now.”

DAVID BIANCO, CHIEF U.S. EQUITY STRATEGIST, UBS, NEW YORK:

“For the equity market it’s a good signal to us the Fed’s paying attention ... Them taking no action is absolutely no surprise. I think if they took action either way that would have been more of a negative for the market, because it would have raised questions of ‘what do they know that we don’t know?’”

RICHARD DEKASER, CHIEF ECONOMIST, NATIONAL CITY CORP.,

CLEVELAND:

“It’s essentially the same as their June statement with the exception that they acknowledged volatility in financial markets. The delivered impression is that monetary policy remains steady with containment of inflation though it will continue to monitor financial conditions.

“It’s going to be good for bonds. It’s most worried about inflation. As with stocks, it’s not so clear. It needs low interest rates as well as growth.”

SCOTT FULLMAN, DIRECTOR OF INVESTMENT STRATEGY, I.A. ENGLANDER

& CO, A BROKER-DEALER IN NEW YORK:

"What the Fed is saying is that they are still worried about inflation and that recent events have not significantly impacted economic growth that would require it to become more accommodative. The market has become volatile in negative territory. Despite that decline, the S&P 500 implied volatility index or the Chicago Board Options Exchange Volatility Index .VIX has risen back to an unchanged level. The CBOE Nasdaq 100 implied volatility index .VXN has spiked higher. We are seeing a return to higher option premiums on the Nasdaq 100 compared to the S&P 500 which has not been seen in several weeks."

JIM CUSSER, SENIOR VICE PRESIDENT AND PORTFOLIO MANAGER,

WADDELL & REED INVESTMENT MANAGEMENT, OVERLAND PARK, KANSAS:

“It was a quick, negative bond market reaction but it has come back just as quick.

“The statement shows that the Fed is not going to be swayed in the short term at least by volatile market conditions and thinks that there is no sustained moderation in inflation yet.”

JIM BIANCO, MANAGING DIRECTOR, BIANCO RESEARCH, CHICAGO:

“Once again the market needs to be reminded that Alan Greenspan is no longer the Federal Reserve chairman. Ben Bernanke has been very clear in the way he conducts policy, in that inflation is his dominant and his major concern. Only an extreme financial crisis will get him to change that and this is not an extreme financial crisis. Those that were disappointed by the statement need to remember who the Fed chairman is.”

TOM SOWANICK, CHIEF INVESTMENT OFFICER, CLEARBROOK FINANCIAL

LLC, PRINCETON, NEW JERSEY:

“Ben Bernanke is trying to build credibility. He and the Fed recognized housing and how some households are experiencing tighter credit conditions and clearly stated financial market volatility -- which shows that they do pay attention to what is happening. But the Fed’s dominant concern is inflation. I think what he did was refreshing -- he is telling the markets, ‘I am watching what is happening but I am not as concerned as you.’”

BRIAN STINE, INVESTMENT STRATEGIST, ALLEGIANT ASSET MANAGEMENT

CO., CLEVELAND:

“I would say the statement was not really what the markets wanted to hear in that the Fed did not move any closer toward a balanced risk assessment and therefore did not move any closer to a Fed ease. They certainly acknowledged increased volatility in the market and acknowledged tighter credit conditions but nevertheless still view the economy as growing and the major risk being inflation. It is definitely not what the markets wanted to hear.”

MARK MEADOWS, MARKET ANALYST AT TEMPUS CONSULTING IN

WASHINGTON, D.C.:

“The market was caught a bit off guard with the Fed’s remarks on inflation as being their primary focus for concern. At this point expectations were for the Fed to address a possible slowdown in the economy as result of the problems with the credit sector. If anything, this may be mildly supportive for the dollar because it may lead traders to pare back expectations for a rate cut as early as September.”

DUSTIN REID, SENIOR FOREIGN EXCHANGE STRATEGIST, ABN AMRO,

CHICAGO:

“The statement is a little more hawkish than what most people expected the Fed to do. There are some changes from this statement and June’s. The dollar may suffer as equities sell-off. The Fed isn’t going to help with the liquidity crunch. It doesn’t appear like they’ll be cutting rates in the next couple meetings.”

MARKET REACTION: - U.S. Treasury debt prices dip after Fed says main concern remains that inflation will fail to moderate. - The euro slipped against the dollar, trading at $1.3737 soon after the report from about $1.3750 shortly prior. The dollar was unchanged against the yen, trading at about 118.45 yen. - U.S. stocks fell after Fed says households and businesses could be facing tightening credit conditions, fueling concern about outlook for profits.

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