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Facing the Recession :
How Bad Will It Be?
PREVIOUS ISSUES
Interest rates will stay unchanged, probably until early next year, although there are signs of dissent from some monetary policymakers. The Federal Open Market Committee (FOMC) kept interest rates unchanged when it met Aug. 5, because the economy is too weak and credit markets too fragile to withstand a hike in rates at this time.
That’s the view held by Federal Reserve chief Ben Bernanke and most of his colleagues on the FOMC, the Fed’s policymaking arm. But Richard Fisher, president of the Fed regional bank based in Dallas, cast a dissenting vote for the fifth time this year.
With the federal funds rate at 2%, the prime rate will be at 5% until 2009, when the economy begins to improve. The fed funds rate is what banks charge each other to borrow funds overnight, while the prime rate is a key benchmark for loans by commercial banks. Many small businesses have loans tied to the prime rate, as do consumers and homeowners with adjustable rate mortgages, home equity lines of credit and credit card debt.
In a statement after the FOMC’s Aug. 5 meeting, the committee gave a nod to inflation worries, saying "although downside risks to growth remain, the upside risks to inflation are also of significant concern."
The Fed needs to assure investors, companies and consumers that the central bank will act quickly if inflation starts to bubble. Officials expressed worry about rising energy prices, in particular, at the previous FOMC meeting in June.
In addition to Fisher, others have publicly voiced concerns about inflation. They favor a rate hike soon to dampen price pressures. Diane Swonk, chief economist with Mesirow Financial, says the dissents "serve a useful function to convince the markets that the Fed remains concerned about inflation potential."
Oil prices have tumbled about $25 a barrel and gasoline prices have fallen as well since the June meeting. That led to a dip in inflation expectations in July as measured by the University of Michigan survey of consumer sentiment.
Another favorable trend is evidence that the dollar is beginning to strengthen after prolonged weakness, which should help keep inflation in check. Officials will monitor that yardstick and others in advance of the next FOMC meeting, which is scheduled for Sept. 16.
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