Is the Fed now stuck between a “rock” and a “hard place” on controlling inflation?
*Bloomberg, by Craig Torres, August 5, 2008:
“The Federal Reserve kept its benchmark interest rate at 2 percent
for the second consecutive meeting as inflation accelerates and the
economic slowdown shows signs of deepening.
‘Although downside risks to growth remain, the upside risks to
inflation are also of significant concern to the committee,’ the
Federal Open Market Committee said in a statement today in Washington.
Chairman Ben S. Bernanke is constrained by threats to both sides of his
mandate to achieve stable prices and full employment. A rate cut risks
pushing inflation higher still; an increase would further tighten
credit, undermine troubled banks and starve the faltering economy of
investment and spending.
‘Labor markets have softened further and financial markets remain under
considerable stress,’ the Fed's statement said. ‘Tight credit
conditions, the ongoing housing contraction, and elevated energy prices
are likely to weigh on economic growth over the next few quarters.’
Dallas Fed President Richard Fisher dissented for a fifth time this
year, preferring an increase.
‘Inflation has been high, spurred by the earlier increases in the
prices of energy and some other commodities,’ the Fed said. ‘The
committee expects inflation to moderate later this year and next year,
but the inflation outlook remains highly uncertain.’
Bleaker Scenario
America's economic outlook has deteriorated since policy makers last
met on June 25, when they paused after the most aggressive series of
rate reductions in two decades.
Gross domestic product shrank in the fourth quarter, and grew at just
an average 1.4 percent annual rate in the first six months of this
year, aided by some $78 billion in tax rebates mailed between late
April and June. The consumer price index rose 5 percent for the year
ending June, and the unemployment rate climbed to 5.7 percent.
‘As a policy maker, it doesn't get any worse than this,’ Fed Governor
Frederic Mishkin said after a speech in Washington on July 28. He will
leave the central bank at the end of the month.
The Fed is the first of three major central banks to set interest rates
this week. The European Central Bank and Bank of England, also beset by
faltering expansions and faster inflation, are forecast by economists
to stand pat.
Housing and Credit
Fed policy makers have cut the benchmark rate by 3.25 percentage points
since the global credit market began unraveling a year ago. The worst
housing slump in a generation sparked a surge in defaults. That led to
the collapse of the market for assets backed by subprime mortgages and
more than $450 billion in asset writedowns and credit losses by the
world's biggest banks and securities firms.
‘We are not necessarily out of the woods with regard to financial
market turmoil,’ Brian Sack, vice president at Macroeconomic Advisers
LLC in Washington, said before the announcement.
‘Any significant disruption to financial markets could lead to a
significant tightening of financial conditions and weaken the outlook
abruptly.’
Residential investment has subtracted from GDP for 10 consecutive
quarters, detracting 0.6 percentage point from the second quarter's 1.9
percent annualized growth rate. The S&P/Case-Shiller index of home
prices in 20 metropolitan areas fell 15.8 percent in May.
The deterioration in housing produced a new bout of financial
instability for policy makers in July. Shares of Fannie Mae, the
largest U.S. mortgage-finance company, and Freddie Mac, the second
largest, plunged in panicky trading, impairing their ability to raise
new capital by selling stock.
At the request of the Treasury, the Fed's Board of Governors agreed
July 13 to loan to the companies if the Treasury's own financial
backstop was insufficient.”
*This information is solely a highlight of the opinion of a third-party publication and is incomplete. Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.
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