Fed says rates are likely to stand
Sounding a gong couldn’t have made it clearer. Federal Reserve officials are putting out the word that further interest rate cuts are unlikely.
Kevin Warsh, a governor of the Fed, ditched the central bank’s cryptic word tangles. “Even if the economy were to weaken somewhat further, we should be inclined to resist expected, reflexive calls to trot out the hammer again,” Mr. Warsh said, referring to the Fed’s key interest rate.
Speaking more characteristically, the Fed’s No. 2 official, Vice Chairman Donald Kohn, said the current stance of interest-rate policy “appears to be appropriately calibrated for now.” Janet Yellen, president of the Federal Reserve Bank of San Francisco, called the current level of rates “appropriate.”
They are amplifying a signal sent by Chairman Ben S. Bernanke and his colleagues last month that the Fed’s most aggressive rate-cutting campaign in two decades may be winding down. The cuts started in September and take months to work their way through the economy.
That does not mean the economy, badly bruised by housing, credit and financial woes, is out of the woods. The Fed, though, is hoping its powerful doses of cuts, along with the government’s relief plan of tax rebates and breaks will help lift the economy in the second half of this year.
Zooming prices for energy and food and other commodity prices are raising some concerns that inflation could take off and spread through the economy. Further reductions in interest rates would aggravate the situation.
In fact, the Fed’s last rate reduction in late April was “a close call,” according to recently released documents of those private deliberations. At that time, two Fed members favored no cut at all, given the concerns about inflation.
Many economists believe the Fed will hold its key rate steady at 2 percent, a four-year-low, at its next meeting June 24-25 and probably through much, if not all, of the rest of 2008.
Holding rates at this level should help foster better economic and employment conditions and moderate inflation, Mr. Kohn said.
Here’s what Fed policy-makers are up against: Cut rates and bolster a weak economy where employers are eliminating jobs and consumers are pulling back; raise rates and fend off inflation.
With the housing market still flailing and foreclosures at record highs, policy-makers probably would shy away from pushing up rates or further interest-rate cuts — even with the specter of inflation — as the country prepares to vote for a new president, some analysts said.
“The Fed has spent the last eight months ushering homeowners with adjustable-rate mortgages to safety by repeatedly cutting interest rates. They won’t want to throw them back under the bus by raising interest rates too much, too soon,” said Greg McBride, senior financial analyst at Bankrate.com. “Candidates would have a field day,” he said.
Mr. Bernanke has said the election would not color the Fed’s decisions. “Political considerations will play no role. We will be objective. We will be analytical, and we will do what is right for the economy,” he said.