Fed holds steady in inflation fight
“Steady Feddy” -- as the Federal Reserve might now be called after seven straight “holds” on interest rates -- apparently won’t try to fix the economy unless it shows signs of breaking.
Even in the face of slow economic growth, the central bank stuck to its guns Wednesday. It said inflation, not the sluggish economy, was still its No. 1 enemy -- disappointing investors hoping for an interest rate cut soon.
The Fed’s policymaking committee, as expected, voted unanimously to keep its benchmark short-term interest rate unchanged at 5.25%. It said in its post-meeting statement that its “predominant policy concern remains the risk that inflation will fail to moderate as expected.”
The Fed acknowledged that growth had “slowed,” but it gave no indication that it was considering doing anything about it by cutting rates.
The debate among analysts and investors today: Does that approach make sense?
Some say the Fed should be more concerned about the possibility that sluggish job creation and a moribund housing market could tip the economy toward recession.
Largely because of the housing slump, economic growth in the first three months of the year dropped to an annual rate of 1.3%, the slowest pace in four years. Employers added a net 88,000 new jobs in April, the lowest monthly gain in more than two years. But the unemployment rate of 4.5% is near a five-year low, far below the 5%-plus levels normally expected this long into an economic expansion.
“With economic growth likely to average close to just 1% or so in the first half of the year, it is just a matter of time before unemployment starts rising,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics, noting that the Fed “remains a slave to the unemployment rate” as its main way of telling whether the economy is slowing. He said the jobless rate would rise “in time for the Fed to start easing in August.”
Others say the Fed is on the right track -- simply betting that the slow economy will reduce inflation and produce a much-desired “Goldilocks economy” that is neither too hot nor too cold.
Already there is some evidence that inflation is subsiding. The Fed’s favorite inflation measure, the so-called core personal consumption expenditures index, fell to an annual rate of 2.1% in March from 2.4% in February.
The Fed wants this measure of consumer prices to be below 2%. The more widely known consumer price index also has shown a similar trend of declining from its peaks.
Scott Anderson, a senior economist at Wells Fargo Economics, said the central bank could stay “on the sidelines” until the end of the year, monitoring growth and inflation for signs that it needs to make a fix.
The stock market largely shrugged off any disappointment over the Fed’s refusal to hint of a rate cut, pushing the Dow Jones industrial average 53.80 points higher to 13,362.87, yet another record high close. That suggests many investors are sanguine about the economy, not overly fearful of heightened inflation or a recession.
For consumers, steady interest rates have become part of the background noise, less important now than rising gasoline prices or widely unaffordable home prices, experts said. At current levels, rates are not enough of a bargain to inspire people to jump into the home market, nor are they a discouragement to keep many people out, said Colleen Badagliacco, a San Jose home broker and president of the California Assn. of Realtors.
“The stability of the rates won’t impact the market as much as just the overall affordability of homes,” she said. “The cumulative impact of rising prices has done more than anything to stall” the housing market.
The central bank last changed its benchmark federal funds rate nearly a year ago, on June 29, when it raised it for a 17th consecutive time. That marked the end of a two-year credit-tightening campaign aimed at slowing the economy enough to head off inflation without tipping it into recession.
For some bearish analysts who see a recession and housing collapse as inevitable consequences of excessive debt and other economic woes, the Fed is fighting a losing battle.
The Fed “hopes to convince the markets that it has the will and the means to snuff out either inflation or a recession, should either develop into a serious threat,” said Peter Schiff, president of brokerage firm Euro Pacific Capital in Darien, Conn. “This underplays the current dangers and overplays the Fed’s ability to come to the rescue.”
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Fed’s statement
From Reuters
Here is the text of the Federal Reserve’s statement Wednesday on interest rates:
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5.25%.
Economic growth slowed in the first part of this year and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to expand at a moderate pace over coming quarters.
Core inflation remains somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.
In these circumstances, the committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.
