Fed Voices Inflation Concerns

[Jul 8, 2008.]

 

The Federal Reserve Bank appears committed not to lower interest rates any more. Perhaps it will even raise the prime rate, due to the mounting worries over America's rate of inflation and currency depreciation. On Wednesday, the Federal Open Market Committee publicly announced its intention to leave the rate at 2%.

The Committee's statement yesterday declared that individual Americans' rate of spending is going up, and that the risk of inflation is going up as well, according to certain measurements. On the other hand, the Committee's statement admitted that high fuel and other energy costs will probably keep the US economy from growing at a normal rate during the rest of 2008.

Stephen Stanley of RBS Greenwich Capital Markets in Connecticut described the Fed's actions as "a baby step" in actually increasing the interest rate, due to the fear of inflation.

When it comes to the question of raising rates, the Federal Reserve faces a dilemma. On the one hand, the US credit and housing crisis are not yet over. The situation with the credit and housing crisis could get worse, and this could combine with high gas and food prices to slow down the economy. America could perhaps be pushed it into recession, especially after individuals have already spent their federal income tax rebates. Raising the rates could be problematic in such a situation. On the other hand, inflation rates are going up and the dollar is losing value. Raising the interest rate could to some extent remedy this problem.

Ben. S. Bernanke, Chairman of the Federal Reserve did not say whether preventing inflation or preventing economic contraction was a bigger priority for the Fed right now. The Federal Reserve Board repeated its pledge from last month to "act as needed" to balance the economy's needs.

Financial speculators are adjusting their expectations of the Fed's actions. The Chicago Board of Trade reports 23% odds that the Fed's benchmark interest rate will stay at 2% three months from now. These odds were at only 2% last week, before the Fed's recent announcements.