Fed Leaves Rate As Is–For Now

After two days of debate, the Fed announced this afternoon that the federal funds rate will remain at 2 percent.

In its April 30 statement, the Federal Open Market
Committee sidestepped the issue of whether it felt growth or inflation was the greater
concern. And now we know: It’s inflation.

After its 9 to 1 vote (according to BusinessWeek, Dallas Fed president Richard W. Fisher voted to increase  the target for the federal
funds rate), the central bank said its focus had shifted to inflation, rather than economic expansion.

"Although downside risks to growth remain, they appear to
have diminished somewhat, and the upside risks to inflation and
inflation expectations have increased," the FOMC said.

The Fed also said it would continue to watch economic and financial developments and act accordingly, according to AFP.

To be fair, inflation is rising: Consumers anticipate average annual inflation of 3.4
percent over the next five years–the highest forecast since
1995, according to a Reuters/University of Michigan survey.

The decision was what most analysts expected–speculation this week suggested the Fed would not change the rate today. 

Stocks rose this afternoon just before and after the announcement, which seemed to calm some fears.

However, the likelihood of the Fed raising rates in the future is very real. The more the Fed expresses concern about inflation–which it again did today–the more likely the group is to kick rates up toward their old levels.

The Fed is in a tricky place–because our economy is, too. Rising fuel and food costs aren’t helping inflation, but the economy is still struggling.

But the questionable effectiveness of all those previous rate cuts may be the biggest argument for raising rates.

The fed funds rate is 2 percent now, but just last September, it was 5.25.

The Fed has offered several cuts since then–and, although it’s true the economy has not officially fallen into a recession yet, it’s pretty darn slow.

And the housing market is still a mess. The government announced today that new single-family home sales fell 2.5 percent last month, and inventory rose.

Despite limited government intervention–including the Hope Now program, which has been widely criticized, and Fannie Mae and Freddie Mac’s approval to enter the jumbo loan market, which according to Bloomberg, also has faltered because the companies are expected to purchase about half of the jumbo loans in 2008 as had been originally predicted–the housing slump has deepened in recent months.

Does it really look like those cuts gave the economy the shot-in-the-arm they were supposed to?

Not really. So could increasing rates really cause too much havoc? Probably not.

But how many cuts we need is anybody’s guess.

At least one source–the Securities Industry and Financial Markets Association survey–is predicting growth for the U.S. in 2009. Released this week, the survey forecast a 2.2 percent growth rate next year–twice this year’s projected pace, according to the International Herald Tribune.

If that’s true, we may be about to climb out of this mess on our own–so let’s not get crazy with the cuts, Federal Reserve.

Do you think a cut will come in September? Do you think it should? Tell us what you think by posting below.