Fed may stay with current 5.25% interest rate
Federal Reserve officials, satisfied that core inflation is slowly declining and likely to continue doing so, will make no change in their 5.25% target for the overnight lending rate when they meet next week.
By Agencies |
Federal Reserve officials, satisfied that core inflation is slowly declining and likely to continue doing so, will make no change in their 5.25% target for the overnight lending rate when they meet next week.
The two-day Federal Open Market Committee session ending on October 25 will be the third in a row at which the rate has remained unchanged following 17 consecutive increases.
A number of the officials have stressed in recent speeches that inflation is too high and that there is still a risk that it could accelerate rather than fall in coming months. Those statements caused investors to back off their expectation that the Fed was likely to begin to reduce the lending rate target in the next few months.
In a New York speech on October 4, Fed vice-chairman Donald L Kohn said, “the odds favour a gradual reduction in core inflation over the next year or so, but the risks around this outlook do not seem symmetric to me: Important upside risks to the outlook for inflation warrant continued vigilance on the part of the central bank.”
Even so, Kohn and most other officials are comfortable with the current policy stance because it gives them the flexibility to raise or lower their lending rate target as economic developments unfold.
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Which direction the next move takes — and when it occurs — may depend on how the spreading slowdown in the housing sector proceeds. That weakness, along with a drop in motor vehicle sales and production and a widening of the US trade deficit, probably knocked economic growth down to a 1-2% annual rate in the third quarter. In an October 16 speech in San Francisco, Janet L Yellen, president of that city’s Federal Reserve Bank, said, “the economy appears to have entered a period of below-trend growth. If this continues for a time, as I think is likely, the tightness we have seen in labour and product markets would ease somewhat, tending gradually to reverse any underlying inflation pressures.”
That’s one of several reasons why she is comfortable with the FOMC’s decision in August to stop raising rates, Yellen said. “I do want to see inflation move down, but I believe policy may now be well-positioned to foster exactly such an outcome while also giving due consideration to the risks to economic activity,” she said.
“We have yet to see the full effects of the series of 17 funds rate increases” on economic activity, while the lending rate target is high enough that it “is currently within the moderately restrictive range that appears appropriate,” Yellen said.
Not all Fed officials participating in next week’s meeting are as sanguine about inflation as Kohn and Yellen. For instance, Jeffrey M Lacker, president of the Richmond Fed, dissented at the last two committee meetings in favour of a quarter-percentage point increase.
Lacker apparently didn’t challenge the view that inflation is likely to decline given the current level of the target. Rather, minutes of the September 20 said, he “dissented because he believed that further tightening was needed to bring inflation down more rapidly than would be the case if the policy rate were kept unchanged.”
Most other officials are more patient, thinking the most important thing is to be on a path toward price stability rather than trying to get back to that point rapidly. For one thing, as the September 20 minutes said, “given the uncertainties in forecasting, significantly more sluggish performance than anticipated could not be entirely ruled out.”
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