The economy avoided two looming problems last week. First, the Federal Reserve Board’s monetary policy committee decided not to bow to pressure from the housing industry and some investors. Ben Bernanke and colleagues refused to announce a halt in its series of interest rate increases. Instead, they took short-term rates to 5%, its 16th consecutive ¼-point increase. More important, the Fed pointed out that “some policy firming may yet be needed to address inflation risks”, and then added the unexceptionable statement that it would study incoming data before deciding what to do at its next meeting. I would hope so, the alternative being to ignore the deluge of new data that will become available when the monetary policy committee again reviews its interest rate policy next month.
So, rather than give in to the increasing crowd of nervous economy watchers who see a slowing housing market as a forerunner to a major general economic softening, and announce that it would hold the line on rates, the Fed chose not to unleash inflationary expectations. With good reason. Most indicators suggest that when the Fed’s monetary policy committee next meets, inflation will be above Chairman Bernanke’s comfort zone of 1%-2%. Consider these offsets to a softening housing market:
*commodity prices are soaring;
*high gasoline prices are starting to ripple through to air fares, freight rates and other prices;
*retail sales are slowing a bit, but remain buoyant;
*wage rates are starting to rise;
*the economy is continuing to grow at something like an annual rate of 3½.
So this is not the time for the Fed to decide that its work is done, and announce that it is packing up its rate-rising tools. Better to let markets know that it is keeping its options open.
Monday, May 15, 2006
So says economist Irwin Stelzer, whom I met at Jim Bowman's AEI talk on "Honor". After he advised me not to sell my home, I looked up his writings on the web. He has a cautiously optimistic perspective:
Posted by LaurenceJarvik at 11:32 AM