Wednesday, August 13, 2008

The Federal Reserve Can Be "Patient"

As we have discussed in previous posts on The Rollins Financial Blog, the falling oil and energy prices have helped to curtail the threat of inflation. Thus, we believe that The Fed has the ability to hold the interest rates where they are for some time to help the weak economy pick up some steam.

On Tuesday, Minneapolis Fed chief Gary Stern was interviewed on CNBC. During the interview, Mr. Stern said, "It (oil prices) should help to alleviate some of the inflation concerns and inflation pressures that we had been confronting, assuming this sticks." Then Stern added, "My guess is it's going to pay to be patient (on interest rates) at this point."

Since Stern is one of the voting members of the FOMC (Federal Open Market Committee), this is interesting news indeed. It was just one month ago that Stern was suggesting that the inflationary risks were something that might need to be dealt with sooner rather than later.

The current combination of lower oil and energy prices and a tight credit market may allow The Fed to do nothing as they hope the low interest rate environment allows the economy to start to get back to normal growth.

"I think it'll taken some time for these headwinds (credit crunch and inflation) to diminish," Stern said, "In fact, I wouldn't be surprised if they didn't pick up a little more momentum first."

Stern did caution that it is too early to make any rush judgments. The number of reports and estimates that must be waded through are numerous, and some may point to a growing economy and some may point to a struggling one. When things do start to improve, The Fed must look to control the first signs of inflation and reign in growth if it happens too quick.

"If you wait till you have conclusive evidence, you run the risk of waiting too long," Stern said. "The real message is that you've got to be willing, at some point along the way, to say 'you know, I have enough confidence in my outlook that it's time to go'."

When questioned about the role that oil prices played in the decision from the August 5th meeting, Stern said, "From my perception, some of the concerns about inflation and inflation expectations seem to have diminished."

Sources: CNBC, Reuters

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