Future Fed Cuts Uncertain With Rising Inflation, Slowing Economy
- Feb 21, 2008
Washington, D.C.–Mortgage rates have crept up in recent weeks and businesses are experiencing a credit crunch as restrictive as the August credit collapse–despite two Federal Reserve short-term interest rate cuts in January, The New York Times reports.The Fed is now facing stagnant growth, higher oil and food costs and increasing inflation. Consumer prices leapt 4.3 percent higher last month compared to 2006–the biggest spike in two years, according to a Labor Department report released Wednesday. Central bank officials said a few hours after the price report that they’d reduced their growth outlook for 2008 to 1.3 to 2 percent and expected unemployment to rise to 5.3 percent. The Fed now thinks growth will be flat for the first six months of 2008, but the economy will rise in the second half of the year because of the interest rate drops and economic stimulus plan.Inflation isn’t yet at the high late-1970s level; and it will surely fall as the economy slows, according to the Times. However, even after removing food and energy prices, inflation has risen 2.5 percent, which is above the Fed’s 1 to 2 percent comfort zone.Minutes from recent Fed meetings released Wednesday show that central bank officials are concerned about consumer confidence tightening credit and slowing both domestic and global financial markets. The Fed noted that both consumers and businesses were having a hard time getting credit and that lenders were still reeling from large mortgage-backed securities losses.The effectiveness of the rate cuts isn’t a sure thing, according to the Times. Slicing rates to encourage growth as oil prices skyrocket, credit becomes harder to get and banks recover from the housing and mortgage collapse can help; but rising inflation makes it harder for the central bank to invigorate the economy with quick money. In addition, the lower interest rates also have pushed down the dollar’s value–which helps raise oil prices even more.