Monday, August 4, 2008

Fed Looks To Hold Rates Steady

On Tuesday afternoon around 2:15 EDT, the Federal Reserve (the Fed) will release a statement detailing their decision on short term interest rates. Based on a Reuters poll of 15 top bond traders on Friday, every single one of them expects the Fed to hold short term rates steady at 2%.

While a couple Fed Presidents have been vocal about raising rates sooner rather than later due to the inflation concerns, the drop in oil prices ($20 drop from last meeting) and contained wage pressures (increased a modest 3.2% year over year) have moved those concerns to the background for now.

The economy is still somewhat fragile with unemployment rising, the housing crisis, and the current credit crunch. If the Fed raises rates, it could hurt the overall economy. Something they definitely do not want to see happen.

So what will come out of the meeting? With the current state of the economy and inflation fears that have lost some steam, the Fed will hold the rates at 2% and take some time to be patient and see what happens next. What they may do though is look to alter some of the statement language to reinforce the message that the next rate move will be upward. They will most likely point to a current weak growth pattern, but mention that inflationary pressures are a growing concern.

"They don't want to give the impression that somehow they have lost their concern over inflation ... that would be fatal," said former Fed Governor Lyle Gramley. Gramley also believes the Fed could hold rates at 2 percent until well into next year.

This meeting could be a good chance to gauge what they are individually and collectively thinking, since it seems that no moves may be forthcoming for some time.

Source: Reuters

2 comments:

Jamie Turner said...

As always, you guys at Rollins Financial are on top of what's going on in the world of finance. Thanks for your valuable updates.

Did I see something over the weekend about Alan Greenspan being less-than-optimistic about the economy? Or did I just imagine that? I can't find it online. Do you guys know?

Rollins Financial Counseling, Inc. said...

Thanks for your comments.

Greenspan was interviewed on Thursday afternoon, and he gave his odds of a recession (50%) and what he thought about the U.S. economy. Although many have been saying that he is to blame for the current economic problems, he did not accept any blame.

Tomorrow's blog by Joe Rollins will discuss some of Greenspan's comments.

You can read a quick article on MSNBC's website by clicking this link.

Thanks again for the comments.