9.2 C
New York
Thursday, March 28, 2024

Thoughts on Fed’s Inaction

Ockham Research believes the Fed’s doing nothing was appropriate; they didn’t discuss the possibility of raising rates.

Fed Inaction Was the Right Move

by: Ockham Research

Today the Fed’s Open Market Committee [FOMC] met to discuss monetary policy and did what was widely expected—nothing. By holding the fed funds target rate at 2%, the FOMC is breaking its streak of seven straight meetings with rate cuts. Since late last summer, when the credit crisis first started to impact the financial markets, the Fed lowered rates aggressively from 5.25% down to 2% over the course of nine months.

Those rate cuts appear to have helped the economy avoid the worst of the possible credit crisis scenarios and now the greater concern for the economy is inflation during a period of slow economic growth. There are bound to be critics of the FOMC’s decision—because there always are—but it was likely the correct path at this time.

There are some who would have liked to see the Fed take a firmer stand in the face of rising inflation, among them Dallas Federal Reserve Bank President Richard Fisher who was the single dissenting vote–his fourth straight dissent. Raising rates at this point in time would be very problematic for the overall economy and would most likely be disastrous for ailing banks and the seriously troubled housing market. Banks desperately need to rebuild their capital base and higher interest rates would severely complicate an already ponderous task. With each week bringing grimmer statistics regarding housing, that market has not yet stabilized enough to absorb higher interest rates.

The FOMC is trying to balance these concerns with diametrically opposed views of many on Wall Street who believe that continued easing is required in order to propel the economy out of its slump. While the economy has slowed over the last few quarters and growth will likely be weak for the next few quarters as well, in our opinion, there is far less justification for further rate cuts at this time. While everyone would like to see the economy grow, such growth would be fruitless if it comes paired with rising inflation.

The declining dollar and record-setting commodity price inflation are already putting stress on the economy; a further decline in the value of the dollar could present far greater problems than slightly lower rates might solve. The price index for personal consumption expenditures—the Fed’s preferred inflation measure—has already risen above 3%–setting off inflation warning bells.

We think that the Fed is in the midst of an interesting balancing act between weak growth and inflation concerns. Although the statement released by the Fed does not inspire a whole lot of confidence for the near term, it was the correct action (or lack thereof) at this time.

Subscribe
Notify of
0 Comments
Inline Feedbacks
View all comments

Stay Connected

157,451FansLike
396,312FollowersFollow
2,280SubscribersSubscribe

Latest Articles

0
Would love your thoughts, please comment.x
()
x