The Fed Has Many Factors to Consider–And A Big Choice To Make
- Jun 24, 2008
It’s Federal Reserve meeting day–and the world is waiting to see how heavily inflation will weigh on the central bank’s decisions.
Although the Fed won’t release a statement until the end of the meeting on Wednesday, anticipation is building that the central bank will leave interest rates alone, according to Forbes.
The Fed also is likely to comment on the issues facing the U.S. economy–including inflation; some forecasts suggest the Fed will hold its main short-term lending rate at 2 percent for the months to come.
Few sources are predicting the Fed will again cut rates this week.
For almost a year, the Fed has offered aggressive cuts. But all the while, the board voiced their concerns about the need to closely monitor inflation.
Although the cuts had a questionable effect on housing–from April to September the cuts pulled adjustable mortgage rates down by just a half a percentage point, and banks remained nervous to lend to each other–they may have helped prevent the slowing economy from slipping into a recession.
- Federal income tax rebates, strong exports and the Fed rate cuts helped the economy exceed expectations this year, according to USA Today.
- But it may not have grown enough: Unemployment increased from 5 percent in April to 5.5 percent in May, and the overall economy only grew by an 0.9 percent annual rate in the first quarter.
The IRS tax rebates–which are still on their way to consumers–are expected to give growth a push; however, once they’re spent, spending and business activity could slow down, USA Today says.
The Fed cuts also had a dark side. While the cuts gave the U.S. economy a shot in the arm, they also weakened the dollar. As imports grew more expensive, inflation grew, too.
And, it would seem, inflation has moved to the front of the concern line.
Inflation is increasing on a global level. Why? The dollar has less power–and the world is taking notice, according to The Wall Street Journal.
And let’s not forget about one of our largest domestic issues: Housing. Last week, 30-year mortgage rates hit their highest level since September, according to Freddie Mac.
Recent reports outlining higher consumer and wholesale prices in May also helped escalate the general concern about inflation, said Frank Nothaft, chief economist at Freddie Mac.
As inflation worries grew, so did speculation that the Fed would lift rates in September, according to the San Francisco Chronicle.
Earlier this month, Fed Chairman Ben Bernanke said the economy had escaped a "substantial" decline–but also said inflation was becoming a bigger concern.
Wages aren’t keeping up with higher food and gas costs; the overall economy may have fared well thus far, but many Americans haven’t.
According to Moody’s Economy.com chief economist Mark Zandi, the Fed has several pressing concerns–the unstable financial system, increasing job losses and inflation risks, USA Today says.
"In effect, they have three problems–but only one interest rate," Zandi said. "This makes for very tough policy decisions and leaves policymakers vulnerable to increasing criticism no matter what they do."
Well, the Fed’s no stranger to criticism (remember that New York Times article from January that essentially said Bernanke was a pushover?).
But with the increasing inflation, financial market and unemployment concerns, it’s hard to say exactly what the best course of action would be.
And it’s hard to guess what the Fed will do. We didn’t expect all those rate cuts at first, either.
Do you think the Fed will hold rates steady this week? Share your thoughts by posting below.