“Fed Speak” indicates no move
BY BENJAMIN MIRASKI, MEDILL NEWS SERVICE
The next Federal Reserve move is going to be no move at all.
No inflation-fighting, no growth stimulus. The nation’s top economists and banking minds think the Fed’s interest rate policy is going to remain flat.
Based on its recent comments, it would almost be silly if the central bank didn’t stay pat.
Go back a few months and look at all the rhetoric about inflation from the Fed regional bank presidents. It started in Dallas in April, with Richard Fisher. He has probably been the most outspoken critic of the current headline inflation (it was running at a 5.0 percent annual rate in June) that consumers are facing.
And he had people joining him on the bandwagon. But he only apparently succeeded in preventing any further cuts in the Federal Funds Rate, the course the Fed was on from last August until April to fix the credit crisis (Thank you, Bear Stearns).
But since May, Fisher has been silent.
Look at the recent comments by Fed Chairman Ben Bernanke and you will see that he isn’t talking about inflation either.
During his speech on regulation, given alongside Treasury Secretary Henry Paulson on July 10:
“The financial turmoil that began last summer has impeded the ability of the financial system to perform its normal functions and adversely affected the broader economy. This experience indicates a clear need for careful attention to financial regulation and financial stability by the Congress and other policymakers.”
No inflation-speak there, just the need for stability.
Bernanke continued in the same vein in his speech before the Senate Banking Committee on July 16. This time, though he addressed inflation, it was only a small part of his speech, and it seemed evident that he was not considering the effects of rising inflation to be widespread:
“Although the inflationary effect of rising oil and agricultural commodity prices is evident in the retail prices of energy and food, the extent to which the high prices of oil and other raw materials have been passed through to the prices of non-energy, non-food finished goods and services seems thus far to have been limited.”
The portion of the speech dedicated to inflation was small compared to the amount of time that Bernanke spent discussing the current financial situation in the credit markets.
Fast forward to the Wednesday release of the Beige Book.
The summary opened on a sour note, leaving little doubt about the most important issue facing the Fed.
“Reports from the twelve Federal Reserve Districts suggest that the pace of economic activity slowed somewhat since the last report,” the Beige Book read.
The comments on inflation were tempered. Prices are not increasing across the country uniformly. While some regions are seeing pressure, others are not, and there is no “wage-price spiral” that would indicate the need for the Fed to step in before things get out of control.
Based on the rhetoric, the Fed is stuck between a rock and a hard place. They can’t continue to lower rates without risk of expanding any inflationary pressure that is there. They can’t raise rates without sending the economy, the Fed’s apparent primary concern, into another downward spiral.
Even options on the Federal Funds rate at the Chicago Board of Trade say standing pat is the most likely outcome.
So come August 5, the only news may be no news at all.
Tags: Ben Bernanke, CBOT, fed funds rate, Fed Speak, Federal Reserve, Henry Paulson, options, Richard Fisher
