Fed interest rate hike? Ask Starbucks, GM and your Realtor
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Plenty to talk about, but nothing to do.
That should sum up the proceedings at the Federal Reserve’s midsummer meeting Tuesday.
Wall Street expects no change in the Fed’s benchmark short-term interest rate, now 2%, even though central bankers from Turkey to Mexico to India, and many points in between, have been raising rates in recent months to battle inflation.
Fed Chairman Ben S. Bernanke & Co. are likely to keep talking a good game about being inflation-vigilant, but they aren’t going to back up the talk with a rate hike any time soon -- not in an economy that has experienced seven straight months of net job losses.
Besides, one argument for a steady Fed is that the source of our current inflation trouble isn’t excess U.S. demand for stuff, but rather waning global supplies -- of oil, of course, and of grains and other commodities.
Many developing economies, such as India, still are growing rapidly enough that tighter credit engineered by their central banks may actually curb inflation by slowing demand.
But what demand would the Fed be seeking to slow by raising interest rates? Demand for houses? Already been there, done that. Ditto for cars, recreational vehicles, boats, home appliances, Starbucks coffee, etc.
What’s more, some analysts see much tougher times ahead for U.S. consumer spending, with the tax rebates now history.
Given the dismal employment story (463,000 jobs lost this year, and a July unemployment rate of 5.7%, a four-year high), along with the shrinking availability of credit as lenders continue to retrench, Goldman, Sachs & Co. economists now ominously forecast that consumers’ cash flow and spending will decline in the second half of this year.
That brings us back to the Fed: Even if, in their heart of hearts, policymakers would prefer to tighten credit, they can clearly see that the financial system already has beaten them to it. Absent a sudden inflation-fueled jump in long-term bond yields or a collapsing dollar, the Fed seems to have nothing to lose by staying on hold for now.