HOW THE FED WORKS HOW THE FED WORKS The Federal Open Market Committee: Who votes on setting interest rates? WASHINGTON  Federal Reserve policymakers welcome recent declines in inflationary pressures, but they aren't declaring victory, dashing any remaining hopes for an interest rate cut in 2007. Fed officials in a unanimous move left their target for short-term interest rates at 5.25%, the highest in 61/2 years, following the conclusion of their two-day meeting Thursday. The Fed has not changed rates since June 2006 after raising them 17 times over two years. STATEMENT: What the Fed said In their post-meeting statement, Fed Chairman Ben Bernanke and his colleagues said the economy was expected to continue to grow at a "moderate pace" during the rest of the year, suggesting growth is not so strong as to warrant a rate increase to slow the economy. But while inflation data have "improved modestly" recently, "a sustained moderation … has yet to be convincingly demonstrated," the Fed officials said. They warned there was a risk inflation pressures could build, disappointing those who had been hoping the Fed would cut rates soon to boost the economy. "Some market participants may have been holding out for a signal that (the Fed) will cut rates, and they didn't get that," Raymond James & Associates chief economist Scott Brown says. He expects the Fed will leave rates unchanged for the rest of 2007, but, "The next move is as likely to be higher as it is to be lower." Financial markets erased modest gains seen prior to the announcement. The Dow Jones industrial average closed the day down 5.45 points at 13,422.28. Inflation has moderated in recent months but still remains on the high side of what some Fed officials, including Bernanke, have deemed their comfort zone of 1% to 2%. The Fed's preferred inflation measure, based on spending excluding food and energy, was 2% in April, down from 2.4% in February. The Fed's decision to leave short-term rates unchanged means a wide range of borrowing costs and interest rates will likely stay the same. Consumers with home equity lines of credit, car loans, variable-rate credit cards and other consumer loans tied to the prime rate will likely see little, if any, change in rates. Mortgage rates, which have risen in recent months, will likely not move higher as worries about rate increases diminish, Quicken Loans chief economist Bob Walters says. Savers hoping for higher rates of return may be disappointed, because rates on certificates of deposit are also not expected to change much. Contributing: Sandra Block Conversation guidelines: USA TODAY welcomes your thoughts, stories and information related to this article. Please stay on topic and be respectful of others. Keep the conversation appropriate for interested readers across the map.
New York Stock Exchange 
The Dow Jones Industrial Average fell more than 280 points, Friday, to 13181.91, just two weeks after soaring to a historic record of 14,000. Two other major indexes, the Nasdaq and the Standard and Poor 500, fell more than 2% in a widespread market sell-off. 

Shares of Bear Stearns, the largest United States underwriter of mortgage bonds, fell 6.3% today, resulting from Standard and Poor's altering its outlook toward the company to "negative" from "stable". The investment banking firm recently saw two of its major hedge funds sink after exposure to the sub-prime mortgage decline. Standard and Poor's report said the firm may have problems, including its hedge funds, that could hurt the firm "for an extended period."

The company held a press conference at noon, but was unable to salvage its stock, leading to heavy losses in the rest of the financial sector. Chief Financial Officer Sam Molinaro remarked that the credit market was in the worst condition he had seen in 22 years.  

American Express shares fell 5.6%, while homebuilder Hovnanian Enterprises fell 9.4% in the sell-off which impacted all the indexes. 
American Home Mortgage Investment Corporation shares fell 52.07% in the session after announcing plans to close most operations and lay off over 6000 employees. The company has also lost its lending license in four states including New York.

"It is with great sadness that American Home has had to take this action," Chief Executive Michael Strauss said in a statement. "Unfortunately, the market conditions in both the secondary mortgage market as well as the national real estate market have deteriorated to the point that we have no realistic alternative."

Analysts say that the weakness in the stock markets and economy in general could prompt the Federal Reserve to lower interest rates, consequently allowing inflation to rise, but that it would also support stocks and ease borrowing. The Fed has not changed interest rates since June 2006.