MONETARY POLICY:THE FEDERAL Reserve has left the benchmark US interest rate unchanged at 2 per cent, citing inflation fears but noting increased strains in financial markets.
The central bank's decision was widely predicted on Wall Street, but dealers on the floor of the New York Stock Exchange booed the announcement and shares tumbled immediately following it.
"Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters.
"Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth," the Federal Open Market Committee said in a statement accompanying its unanimous decision.
"The downside risks to growth and the upside risks to inflation are both of significant concern to the committee.
"The committee will monitor economic and financial developments carefully, and will act as needed to promote sustainable economic growth and price stability."
The Fed decision came a day after the Dow Jones Industrial Average fell by more than 500 points, its worst drop in a single day since the September 2001 terrorist attacks.
In mid-afternoon trading yesterday the Dow rose 95.91, or 0.88per cent, to 11,013.42, but fell about 100 points soon after the Fed announcement.
Earlier the Dow rose as much as 105 points and fell as much as 175 in fractious trading.
Yesterday's decision leaves the target Fed funds rate for interbank lending unchanged at 2 per cent for a third consecutive meeting.
The bank took no action on the discount rate for loans to brokers and commercial banks, which stands at 2.25 per cent.
The interest-rate decision came as talks to save struggling insurance giant AIG appeared to falter amid reports that the company could file for bankruptcy as early as today.
AIG's hopes of securing a $75 billion credit line from the biggest US banks dimmed after major ratings agencies downgraded the insurance company's debt.
AIG owns numerous insurance businesses around the world, most of which are doing well, but its London-based financial products division has underwritten billions of dollars worth of derivatives insuring mortgage-linked securities.
The downgrade in AIG's debt rating means that counter-parties in those derivative contracts can demand that the company posts billions of dollars in fresh collateral.
Meanwhile, attention on Wall Street turned to the future of Goldman Sachs and Morgan Stanley, the only two big investment banks that remain independent after the collapse of Lehman Brothers and the takeover of Merrill Lynch by Bank of America this week.
Goldman Sachs yesterday posted its worst slump in profits since going public in 1999, announcing that profits fell by 71 per cent in the third-quarter compared to the same period last year.
Goldman Sachs's chief financial officer, David Viniar, rejected the view of some Wall Street analysts that the firm needed to combine with another bank to survive, arguing that the collapse of its rivals has created opportunities.
"We feel for the people in these institutions. They were very good firms that made the same mistakes we did. They made bigger ones and got caught up in a terrible market.
"While we have a lot of compassion, when there's less competition it is better for us."
"That sends more business our way, gives us pricing power, and were seeing a little of that now."
