Fed leans to inaction and leaves interest rate at 2%
Cautious central bankers see inflation as a big issue
by Tom Stundza -- Purchasing, 8/6/2008 5:11:00 PM
The Federal Reserve Board’s decision to leave the federal funds rate at 2% is akin to a soldier under fire who remains hunkered down in its foxhole for the time being. That’s the instant analysis from Scott Anderson, senior economist at Wells Fargo Economics in Minneapolis. (Anderson will speak next month at the Chemical Purchasing Summit being sponsored by Purchasing and ICIS Chemical Business magazines.)
In an e-mail to Purchasing.com, the economist says “The Fed is currently trying to juggle three balls in the air at the same time: maintain price stability, promote an environment conducive to economic growth and rescue the financial system from catastrophic failure.” Upshot: The direction and timing of future interest rate changes remain highly uncertain.
The Wall Street Journal Online agrees, noting to subscribers that “the Federal Reserve's explanation of monetary policy yesterday struck the kind of cautious rhetorical balance more often associated with election-year politicking: simultaneous bids to assure both those who worry more about economic growth and those more spooked by inflation.”
The problem, Anderson explains, is that “the Fed largely kept its language on economic growth and the outlook unchanged, but noticeably sharpened its rhetoric on inflation.” In its public statement, the central bank notes: “Inflation has been high, spurred by earlier increases in the prices of energy and other commodities, and some indicators of inflation expectations have been elevated.”
Anderson suggests that “this tougher talk on inflation from Fed Chairman Ben Bernanke and the FOMC (federal Open Market Committee), along with renewed evidence of turmoil in the credit and money markets, has brought more FOMC members on board with the current policy stance.” There is still a chance for a Fed rate hike as early as December this year, but the decline in oil prices, if sustained, reduces that probability, Anderson adds.
Crude oil prices in commodity markets have fallen below $120/barrel this week for the first time in three months and far below the record $147 set just last month. United Press International reports that crude oil prices rose only slightly this morning to $119.48/barrel on the New York Mercantile Exchange from $119.17 on Tuesday.
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