And on the 18th day, the Fed rested.
Ending a remarkable streak of 17 straight increases dating to mid-2004, Federal Reserve policymakers met Tuesday and decided to leave interest rates unchanged, citing clear evidence that the long rate-hike campaign is cooling the economy.
“Economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices,” the Fed said in a statement announcing its decision.
Yet the long-awaited “pause” does not mean Fed Chairman Ben Bernanke and his colleagues believe inflation has been vanquished. The central bank left the door open to future rate hikes, saying “the extent and timing of any additional firming that may be needed” would depend on the outlook for both inflation and economic growth.
One central banker, Richmond Fed President Jeffrey Lacker, voted against the move, saying he would have preferred to hike rates another quarter-percentage point.
But the majority view held that "inflation pressures seem likely to moderate over time." And with clear signs of economic slowing, including last week's report of weak employment growth, every rate hike raises the risk that the Fed will go too far and choke off the expansion.
Central bankers have decided, for now at least, that leaving rates unchanged is the safest course of action.
The decision, made after a closed-door meeting of the Fed's policy-making Open Market Committee, leaves the benchmark overnight lending rate to 5.25 percent and the commercial bank prime lending rate at 8.25 percent, the highest levels since March 2001.
Financial markets wobbled after the announcement, with stock prices initially rising and then falling. Broad market indicators ended the day moderately lower.
Market analysts had been divided over what the Fed would do, with the outcome considered more uncertain than at any scheduled meeting in years. Yet by the time the Fed made its announcement, a majority of analysts and big investors had concluded that the Fed indeed would pause.
On reason was last week's report of weak job growth in July for a fourth straight month, pushing up the nation's unemployment rate to 4.8 percent from 4.6 percent. Another report showed the overall economy, after racing ahead at an annual rate of 5.6 percent in the first three months of the year, slowed to less than half that pace — 2.5 percent — in the spring.
Yet as the meeting began the government reported that productivity slowed sharply in the spring while labor costs rose, a combination that can spell inflation down the road.
That is one reason many analysts believe the Fed will need to raise rates again in September or October and possibly yet again before the current cycle is over.
"What they don't know yet — and nobody does — is how to balance the weakness in the economy with what is clearly an upward trend in inflation," said Nariman Behravesh, chief economist at Global Insight, an economic forecasting firm. "Our best guess is that they are not going to be able to sit on the sidelines as inflation creeps up for the next six months or maybe a year."
This week's shutdown of the Prudhoe Bay oil field in Alaska is just the latest contributor to an environment of rising energy prices that is pushing prices higher, slowly but steadily, in the broader economy.
But with the economy slowing, another rate hike is not a "foregone conclusion," said Mark Zandi, chief economist of Moody's Economy.com.
"The economy has clearly slowed, and more slowing is yet to come," he said. "They run the risk of going too far, which they have done in the past. That is the debate."
Zandi said the odds of the Fed pushing the economy into recession are still low, but that possibility is certainly on the minds of policymakers.
"They are trying to avoid that and get the proverbial soft landing," he said.
Other analysts were more troubled by Tuesday's signs of wage inflation. Labor costs rose in the latest quarter at a 4.2 percent annual pace, well above the first quarter’s 2.5 percent.
Still, by the time the report was issued most market participants were expecting the Fed to go on hold, and Bernanke likely did not want to upset market expectations, Behravesh said.
It was the first time since May 2004 that the Fed panel, then under the leadership of longtime Chairman Alan Greenspan, has met and decided to leave rates unchanged. At that time the overnight lending rate was at a 46-year low of 1 percent.
With the low interest rates fueling home sales and boosting economic growth, the Fed began its series of 17 straight quarter-point rate hikes.
Following is the full text of the statement issued by the Fed at 2:15 p.m. ET:
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.
Economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.
Readings on core inflation have been elevated in recent months, and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.
Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack Guynn; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting.