Fed Faces Tough Decisions in Effort to Stabilize the Economy
Food and energy prices have surged, but housing prices are deflating. The stock market is down, and economic growth has slowed. What is the Federal Reserve to do?
The answer, according to Paulette Miniter of SmartMoney.com, depends in part on whether the run-up in commodity prices is really a reflection of inflation caused by more money being put in the system – it is Fed's job to manage the money supply – or whether the prices reflect higher demand and speculation.
Last Wednesday, the central bank, as expected, lowered its target for the federal-funds rate to 2 percent from 2.25 percent. Wall Street also expected the Fed to signal a pause in its rate-cutting, which began back in September 2007 with the fed funds target at 5.25 percent.
In its statement, the Fed said tight credit conditions and the housing downturn will likely weigh on the economy over the next few quarters. It also said it expects inflation to moderate in coming quarters, although "uncertainty about the inflation outlook remains high."
Going forward, the Fed said it will "act as needed" to promote economic growth and price stability; that's a contrast from its prior statement in March in which it said it "will act in a timely manner as needed."
As of now, growth is just starting to slow. According to SmartMoney.com, gross domestic product increased at a snail's 0.6 percent pace in the first three months of this year, the same rate as in the fourth quarter. On an annual basis, the trend has been downward. GDP rose 2.2 percent in 2007, after rising 2.9 percent in 2006 and 3.1 percent in 2005.
Looking ahead, despite worries that high food and energy costs are adding to consumers' pain, many on the Street expect the Fed to eventually take rates even lower by the end of this year even if it holds rates steady at its next meeting in June.
– By Ed Coury, senior editor and Midwest bureau chief for the Wall Street Journal Radio Network, Dow Jones & Co., and a reporter for WWJ Newsradio 950. This report includes information previously published by Dow Jones’ SmartMoney.com.
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