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US Markets Rally on Central Bank Decision to Hold Interest Rates Steady

The Federal Reserve, the US central bank, decided Tuesday to hold short-term interest rates steady at two percent. VOA's Barry Wood reports stock markets rallied after the Fed statement suggested that there may be no interest rate increases until after the November presidential election.

The Fed statement suggested that economic growth is likely to be slow over the next few months. Accordingly, the central bank said it was holding rates steady despite increasing inflationary pressure.

Stock markets, which were rallying before the mid-afternoon announcement, considerably accelerated their gains late in the sesssion with the Dow Jones Industrial Average up over 300 points.

Analysts interpreted the Fed statement to mean that rates are likely to remain at current levels until after the November presidential election. Montary policy analyst Bill Gross says the Fed is holding steady in large part because in addition to inflation there is also countervailing deflationary pressure in the economy.

"With commodities [prices] coming down, all assets are declining. I mean global stock markets are declining. Global bond markets are declining in price. Global commodities are declining in price. This is an asset deflation of significant proportions," he said on CNBC television.

The commodity price decline has been pronounced in recent weeks following a multi-year advance that saw oil prices rise by 500 percent since 2000. Since touching a high of $147 a barrel a month ago, oil has declined by nearly 20 percent to Tuesday's closing price of under $120.

American consumers have not only been hard hit by rising fuel prices but also by unprecedented declines in home values, the principal asset of most American families. Home prices are down 15 percent nation wide in the past year and experts say further declines are likely.

In addition to worries about oil and home prices, for the past year credit conditions have been severely strained and bank loans are hard to come by. Lending institutions have registered losses of nearly $500 billion, mostly from risky loans in the housing sector.

Experts say that monetary policy makers face significant challenges as risks are balanced between sluggish growth and rising inflation. The U.S. economy has shed half a million jobs this year and the current unemployment rate has climbed to 5.7 percent. Economic growth has been barely positive while the stock market has declined 20 percent from its record highs of last October.