Blacknbengal
Well-Known Member
Inflation news gives Fed room to maneuver
But cutting interest rates too fast could stoke future price pressures
Rate cut coming?
Sept. 14 ? With the financial markets still jittery, two former Federal Reserve governors look at the decisions facing the Fed?s rate setting committee next week.
Tuesday?s report that inflation appears to be under control will give the Federal Reserve?s interest rate-setting committee a little breathing room to make a widely-expected cut in its target federal funds rate for the first time in more than four years.
Forecasters are divided on whether the Fed will cut the benchmark rate by a quarter-percentage point or a more aggressive half-point at its policy meeting Tuesday, as central bankers respond to the first economic crisis since Chairman Ben Bernanke took office 19 months ago.
No matter which course they choose, central bankers still face significant risks. A course of gradual rate cuts could come too slowly to keep the slowing U.S. economy from being dragged into a downturn by the housing recession. On the other hand, rapid, aggressive cuts could spark another round of the kind of easy credit that created the housing bubble ? and risk eroding gains in the Fed?s hard-fought battle to keep inflation under control.
The Fed?s rate-setting Open Market Committee got two more pieces of economic data to chew on ahead of Tuesday?s widely-watched rate announcement, which is expected at 2:15 p.m. ET. Wholesale prices fell by 1.4 percent in August, led by a big pullback in energy prices; even without that drop, so-called "core" inflation rose just 0.2 percent, according the Labor Department.
Meanwhile, the ongoing mortgage mess continued to widen in August. As the financial markets remained skittish about the risk of rising defaults, the number of foreclosure filings more than doubled from a year ago and jumped 36 percent from July, according to a RealtyTrac, a Web site that specializes in foreclosures.
As a result, Fed watchers say, the central bank is fighting a battle on two fronts. On one side, it is trying to push money into the banking system, recently cutting the rate on direct loans to banks through its so-called discount window, to calm the storm that hit the financial markets a month ago.
Those moves to pump money into the banking system have already pushed the cost of money well below the Fed?s official target rate. According to the Fed?s own data, the ?effective? federal funds rate fell as low as 4.54 percent Aug. 14 as the central bank added liquidity to put out the fires sweeping through money markets.
The Fed tries to maintain its target rate through daily sales or purchases of Treasury securities from primary dealers, adding or draining cash to try to balance the supply of money with demand.
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But cutting interest rates too fast could stoke future price pressures
Rate cut coming?
Sept. 14 ? With the financial markets still jittery, two former Federal Reserve governors look at the decisions facing the Fed?s rate setting committee next week.
Tuesday?s report that inflation appears to be under control will give the Federal Reserve?s interest rate-setting committee a little breathing room to make a widely-expected cut in its target federal funds rate for the first time in more than four years.
Forecasters are divided on whether the Fed will cut the benchmark rate by a quarter-percentage point or a more aggressive half-point at its policy meeting Tuesday, as central bankers respond to the first economic crisis since Chairman Ben Bernanke took office 19 months ago.
No matter which course they choose, central bankers still face significant risks. A course of gradual rate cuts could come too slowly to keep the slowing U.S. economy from being dragged into a downturn by the housing recession. On the other hand, rapid, aggressive cuts could spark another round of the kind of easy credit that created the housing bubble ? and risk eroding gains in the Fed?s hard-fought battle to keep inflation under control.
The Fed?s rate-setting Open Market Committee got two more pieces of economic data to chew on ahead of Tuesday?s widely-watched rate announcement, which is expected at 2:15 p.m. ET. Wholesale prices fell by 1.4 percent in August, led by a big pullback in energy prices; even without that drop, so-called "core" inflation rose just 0.2 percent, according the Labor Department.
Meanwhile, the ongoing mortgage mess continued to widen in August. As the financial markets remained skittish about the risk of rising defaults, the number of foreclosure filings more than doubled from a year ago and jumped 36 percent from July, according to a RealtyTrac, a Web site that specializes in foreclosures.
As a result, Fed watchers say, the central bank is fighting a battle on two fronts. On one side, it is trying to push money into the banking system, recently cutting the rate on direct loans to banks through its so-called discount window, to calm the storm that hit the financial markets a month ago.
Those moves to pump money into the banking system have already pushed the cost of money well below the Fed?s official target rate. According to the Fed?s own data, the ?effective? federal funds rate fell as low as 4.54 percent Aug. 14 as the central bank added liquidity to put out the fires sweeping through money markets.
The Fed tries to maintain its target rate through daily sales or purchases of Treasury securities from primary dealers, adding or draining cash to try to balance the supply of money with demand.
Link
