Federal Reserve & Interest Rates

The minutes of the last FOMC meeting, when the Fed decided to again reduce interest rates, were released yesterday.  Expectations were that both rate cuts would be sufficient to sustain the economy, at least for the short term.  Economic difficulties have risen from the continued faltering of the housing market, ever tightening credit conditions and rising energy prices.  Looking forward, the Federal Reserve Board anticipates sluggish growth for the economy and an increase in unemployment.

Inflation continues to be a matter of concern for the Fed, and there is much uncertainty surrounding the matter.  Energy prices may continue to rise.  Core inflation has only been affected slightly, but it may be another year before we see improvement in energy costs.  Core inflation is expected to lessen in a few years.

Sub-prime mortgage troubles and high inventory of unsold homes may contribute to the increase of unemployment.  Other problems stemming from the housing market conditions include the major credit crunch, which is making it more difficult and expensive for borrowers to obtain funds (individuals and businesses alike).  Tighter credit conditions could also lead to a weakening in household and business spending.

There is a possibility that financial market turbulence could have “a larger-than anticipated adverse” effect on household and business spending as well.

Should the housing sector experience further collapse, general economic growth would certainly experience a drag in pace.  The committee expressed hopes that the economy will pull through.  The minutes from the last meeting said “the U.S. economy had proved quite resilient to episodes of financial distress, suggesting that the adverse affects of financial developments on economic activity outside the housing sector could prove to be more modest than anticipated.”

Even with that said there is still plenty of uncertainty.  Additional rate cuts are unlikely for December, based on the confident tone of the Fed that the two recent cuts are sufficient enough to sustain the economy at least or the short term. 

Chairman Ben S. Bernanke and Fed Board Governor Randall S. Kroszner have already alluded to the possibility of economic slow down.  We will simply need to brace ourselves for the coming difficult days.  Things are expected to get just a little worse than they are now before they get better.  With the uncertainty surrounding energy costs and just how much more the problems in the housing sector will dampen our economic performance make it hard to predict what will happen next.

The Federal Reserve plan to make monetary policy making and economic outlook projects more frequent and more available to the public, according to a press release last Wednesday.  Perhaps with these efforts we can all get a clearer picture of the future.