Status Quo, For Now

9 August 2006



Fed Takes a Rate Hike Rest

The Federal Reserve decided not to raise interest rates at its meeting yesterday. It was the first meeting of the Federal Open Market Committee that didn’t end in a rate increase since the tightening began in June 2004. That said, the decision was not unanimous, and in the Fed’s collegial atmosphere, that signals that future rate hikes are not out of the question.

The Fed’s statement read, “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.” Seventeen consecutive rate hikes will do that, even if they are only a quarter of a percentage point each spread out over two years.

The Fed’s statement also said, “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.” Sentence one is cancelled out entirely by sentence two. Were this a symbolic logic class, the professor could erase the entire paragraph.

Before stating how each governor voted, the statement said, “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.” In other words, the FOMC’s job is to keep an eye on inflation, and that’s what it’s going to do. No one likes to see a central banker without anything to do.

The economy is clearly losing steam. The GDP growth rate dropped to 2.5% in the second quarter from 5.6% in the first. The non-farm payrolls (that is, jobs) for July were just 113,000, not enough to deal with rising populations. The unemployment rate (a surprisingly crummy measure of who has work) rose to 4.8% in the latest report. The Fed is standing guard on inflation, but indicators are that recession is a bigger risk.

© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

Home

Google
WWW Kensington Review







Amazon Honor System Click Here to Pay Learn More