Fed Holds Rates at 2% As Expected

The Fed today announced it was keeping rates at 2% as was widely expected. It's announcement opened the door for future rate hikes as its statement mentioned the danger of inflation.

The Fed today announced it was keeping rates at 2% as was widely expected.  Its announcement opens the door for future rate hikes citing inflation as a concern.  The full Fed statement is below:

"The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending.  However, labor markets have softened further and financial markets remain under considerable stress.  Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.

The Committee expects inflation to moderate later this year and next year.  However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time.  Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased.  The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.  Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting."

 

While there has been some criticism in the business press about the Fed's fence-sitting, this seems like a sensible policy.  The slowing economy should act as a brake on inflation.  If the Fed were to cut rates it risks increasing inflation.  If the Fed were to increase rates, it might slow an already weak economy.  So, do nothing for now sounds about right. 

The Fed is also betting that oil and commodity prices have had their run and price increases will slow or even go negative.  This also seems like a sensible assumption.

If inflation does not moderate then the Fed leaves the window open for future rate increases.  Most markets believe this will eventually happen.  Longer term treasury rates have risen and futures markets are predicting a rise in rates for later this year.  The banks that we cover on BestCashCow have also been aggressively raising rates, demonstrating what they think will happen in the intermediate term.

Here what others are saying:

Fed sharpens its focus on inflation - Marketwatch

Fed Keeps Rates Steady But Notes Inflation Worries - NY Times

Fed leaves rates unchanges - Fortune

Fed Keeps Rates at 2%, Cites Upside Inflation Risks - Bloomberg

Sol Nasisi
Sol Nasisi: Sol Nasisi is the co-founder and a past president of BestCashCow, an online resource for comprehensive bank rate information. In this capacity, he closely followed rate trends for all savings-related and loan products and the impact of rate fluctuations on the economy. He specifically focused on how rates impact consumers' ability to borrow and save. He also has authored a wee

Your code to embed this article on your website* :

*You are allowed to change only styles on the code of this iframe.

Comments

Add your Comment