- The Washington Times - Thursday, March 29, 2007

Federal Reserve Chairman Ben Bernanke and his Board of Governors last week voted unanimously to keep a key short-term rate steady. The federal funds rate, which is the rate banks charge each other for overnight funds, was held at 5.25 percent.

In a very broad sense, the job of the Federal Reserve is to set monetary policy so that the economy is in balance between healthy growth and moderate inflation. Loose monetary policy, which includes low interest rates, will help spur economic growth, but an overheated economy can induce inflation. On the other hand, tight monetary policy, which includes higher interest rates, can stifle economic activity and provide an atmosphere conducive for a recession.

After reading the Fed’s statement, my take is simple: The Fed has no clue where the economy is headed. Let’s take a look.

“Recent indicators have been mixed, and the adjustment in the housing sector is ongoing.” My translation: The Fed has no idea if the economy is going in a positive or negative direction. After its meeting in January, the Fed labeled the economy as “somewhat firmer.”

“Recent readings on core inflation have been somewhat elevated.” My translation: The Fed has decided that inflationary pressures are stronger than they were in January. However, in the very next sentence, the statement declares that “inflationary pressures seem likely to moderate over time.”

OK. Fair enough. Inflation is elevated currently but will ebb in the future.

Let’s go back to the statement that the “adjustment in the housing sector is ongoing.” It sounds to me as if the Fed believes we have not seen the bottom of the recent housing slump. In the January statement, it declared that there were some “tentative signs of stabiliza-tion” in the housing market.

The Fed dropped the phrase used in January that “additional firming may be needed,” which analysts interpreted as a sign that its next move would be a decrease. So it dropped a hint that it might raise rates but added a declaration that inflation is “somewhat elevated.”

I’m certainly confused.

Perhaps the last sentence of the statement sums up the Fed’s ambivalence: “Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.”

Translation: We are going to wait and see what happens because we have no idea where the economy is going.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail (henrysavage@pmcmortgage.com).

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