Stocks Jump on Fed's Prediction for Inflation

Traders work in the crude oil options pit at the New York Mercantile Exchange. Oil fell $2.24 yesterday, to $119.17 a barrel, contributing to the Dow's biggest one-day gain in four months. (By Jin Lee -- Bloomberg News)

The central bank also held the federal funds rate steady at its late June meeting, following steep cuts in the winter and spring meant to prevent a deep and prolonged recession. The decision to stay on hold reflects a difficult situation in which growth is weak yet prices are rising. Those pressures effectively act as counterweights, leading the Fed to stand pat.

"They can't commit to dealing with one of these ailments without making one of the other ones worse," said Richard Yamarone, chief economist at Argus Research. "There's nothing the Fed can do, so they're going to stay where they are."

The Fed made relatively subtle changes to its statement following its June 24-25 meeting, backing away from a statement that risks to growth "appear to have diminished somewhat." Since June, strains in the financial markets have returned, and the economy has come to look weaker.

But there has been good news since then, too, as prices for oil and other commodities have dropped. The Fed statement said that it expected prices to level off but that the "inflation outlook remains highly uncertain."

That can be taken to mean that the Fed would be willing to raise rates if there were a new spike in oil and other commodity prices or further big drops in the value of the dollar.

"Although downside risks to growth remain, the upside risks to inflation are also of significant concern," the statement said, a subtle indication that it is more likely to raise rates in the months ahead than to cut them further.

There was, for the eighth straight meeting, dissent on the committee. Richard W. Fisher, president of the Federal Reserve Bank of Dallas, voted against leaving rates unchanged, preferring to raise them. He also dissented in June, arguing that the Fed should take a more aggressive line to combat inflation.

"Fisher has been dissenting for a long time, but his opinion is clearly the minority view," said Arun Raha, a senior economist with Swiss Re. "They're signaling they're going to hold rates constant for a while."

Also yesterday, a new Fed governor, Elizabeth A. Duke, was sworn in after being confirmed by the Senate earlier this summer. A former executive of Portsmouth, Va.-based TowneBank, Duke has also been chairman of the American Bankers Association and an executive with Wachovia.

Duke is expected to play a major part in the Fed's role supervising banks. In her first meeting, she voted with the majority to leave the federal funds rate unchanged.