FED LETS RATES STAND.

Byline: Martin Crutsinger Associated Press

The Federal Reserve left interest rates unchanged Tuesday, passing up a chance to boost rates for a third time since June. But the central bank warned that further increases could still be needed to cool the booming economy and keep inflation under control.

The Fed's warning sent stock prices on a wild roller-coaster ride during the final two hours of trading, swinging from a gain of 106 points immediately before the Fed announcement to a 124-point loss. The Dow then rebounded to finish down by 0.64 point at 10,400.59.

Interest rate jitters also pounded the bond market, where a sharp drop in demand pushed the yield on 30-year Treasury bonds up to 6.17 percent, the highest level since early August.

Stocks had posted a 128-point gain on Monday on hopes that the Fed would not raise rates and would also keep its policy directive, meant to signal possible future moves, at neutral.

But, while keeping rates unchanged, the Fed switched its policy directive from neutral to one leaning toward increased rates, warning that it would remain ``especially alert'' to any inflation threats coming from tight labor markets.

``This is a clear-cut indication that another rate hike is coming, and the markets were not prepared for that news,'' said Allen Sinai, chief economist at Primark Global Economics in New York.

The Fed raised its target for the federal funds rate, the interest that banks charge each other, for the first time June 30, then followed that action with another quarter-point increase Aug. 24, pushing the funds rate to 5.25 percent.

Commercial banks matched those increases with similar quarter-point increases in their prime lending rate, the benchmark for millions of consumer and business loans. The prime rate now stands at 8.25 percent.

After the August increase, the Fed left its policy directive at neutral, saying it believed its two quarter-point rate hikes ``should markedly diminish the risk of rising inflation going forward.''

However, since that time, various economic statistics have shown that the economy has continued to grow strongly, powered by strong consumer spending and the lowest unemployment rate in almost three decades.

In its statement, the Fed said that ``the growth of demand has continued to outpace that of supply, as evidenced by a decreasing pool of available workers.''