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Business
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Saturday, June 28, 2008, 3:00 AM
Aggressive Fed rate-cutting done? The Associated Press WASHINGTON — The Federal Reserve’s aggressive period of cutting interest rates to keep the country from falling into a recession is over. That point is in general agreement. The trouble starts when you try to figure out what period the Fed has now entered. Could the central bank keep rates unchanged for a considerable period? Yes, many analysts say, predicting that the Fed will leave rates alone until next spring. However, other economists are still worried that the Fed could start ratcheting up rates much sooner than that, especially if this year’s surge in oil prices does not soon abate. The Fed didn’t offer much of a road map in its latest policy statement issued Wednesday announcing that the central bank, for the first time since last August, had left the federal funds rate, the interest banks charge each other, unchanged at 2 percent. That decision followed a period from September through April in which the central bank, trying to deal with a severe credit crisis and housing slump, cut the funds rate at the most aggressive pace in more than two decades. In their statement, Federal Reserve Chairman Ben Bernanke and his colleagues let it be known that they are now less worried about the economy slipping into a recession and more worried about inflation. “Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased,” the statement said. That wording, however, was somewhat bland, even by the guarded standards of Fed-speak, especially given the pronouncements of Bernanke and other Fed policymakers, who openly worried in recent speeches about the inflation pressures that could be spawned by a weak dollar and surging energy prices. It was those comments that caused financial markets to start pricing in rate hikes, possibly beginning as early as the Fed’s August meeting. Now after Wednesday’s announcement, the expectations of imminent rate hikes have subsided considerably. Other economists, however, suggested that Bernanke was trying to use words to finesse a difficult period for Fed policy-makers. By talking tough about inflation, it caused interest rates set by financial markets to move up in value and also helped to stop a worrisome slide in the value of the dollar, a decline that has been blamed for driving up the price of oil and other globally traded commodities, a development that was increasing inflation pressures in the United States. All of those outcomes were achieved by Bernanke merely talking tough without having to resort to actually raising interest rates at a time when the economy is still very fragile. David Jones, an economist at DMJ Advisors, said the Fed is trying to avoid a replay of the wage-price spiral of the 1970s when successive oil shocks triggered rising inflation and higher wage demands from workers. That set off a vicious spiral that was only brought under control by painful interest rate increases that triggered a steep recession in 1981-82.
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