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WORLD> America
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Fed talking tough on the threat of inflation
(Agencies)
Updated: 2008-06-25 16:06 WASHINGTON - Federal Reserve Chairman Ben Bernanke and his colleagues are updating Teddy Roosevelt's admonition to speak softly and carry a big stick. The Fed policymakers are starting to raise their voices while brandishing the stick even though they don't appear ready to use it.
When the Fed concludes a two-day meeting on Wednesday, it is widely expected that the central bank will express more concerns about inflation and in that way signal that rate increases could be on the way. However, at the same time, private economists are widely in agreement that the Fed will not actually start raising interest rates, given how weak the economy is at the moment. "The Fed is caught between a rock and a hard place," said Sung Won Sohn, an economics professor at California State University. "The economy seems to be slipping into a recession at the same time that inflation is getting worse." There was more bad news Tuesday when the Conference Board reported that its gauge of consumer sentiment dropped in June to the lowest reading in 16 years as soaring gas prices, rising unemployment and sinking home values continued to batter Americans. The opposing forces of weak growth and recession put the central bank in a bind. Its main policy tool - changes in interest rates - can only address one of those problems at a time. The Fed can cut interest rates to spur consumer and business spending and economic growth or it can raise interest rates to slow spending and growth and ease inflation pressures. From September through April, the Fed aggressively cut interest rates seven times in an effort to keep a severe credit crunch and prolonged housing slump from pushing the country into a deep recession. However, after a series of sizable rate cuts as the credit crisis was roiling global financial markets at the beginning of this year, the Fed at its last meeting in April reduced rates by a more modest quarter-point. That pushed the federal funds rate, the interest that banks charge each other, down to 2 percent. The funds rate had been at 5.25 percent before the central bank began cutting rates on Sept. 18. If the Fed leaves the funds rate unchanged, it will mean that commercial banks' prime lending rate, the benchmark for millions of business and consumer loans, will remain unchanged as well at 5 percent, the lowest it has been since late 2004. It will be the first Fed meeting without any change in interest rates since August. While a stand-pat rate decision is widely anticipated, financial markets will be closely watching exactly how Bernanke and his colleagues explain their views about economic conditions. Investors will be searching for clues on whether the Fed is feeling increasing pressure to start raising interest rates in light of soaring prices for oil, food and other commodities. In a speech on June 9, Bernanke took a tough line on inflation, saying that the Fed would "strongly resist an erosion of longer-term inflation expectations." Those comments and tough talk from other Fed officials unnerved investors who went from thinking the Fed might leave rates unchanged for most of this year to starting to worry that rate hikes could begin this summer. It also left some economists grumbling that once again the Bernanke Fed was unnecessarily roiling markets. "When it comes to clearly communicating policy intentions to financial markets, the Bernanke Fed has been the gang that can't shoot straight," said Stephen Stanley, chief economist at RBS Greenwich Capital. |
