Federal Reserve & Interest Rates

The latest economic data has revealed that both the Producer Price Index (PPI) and the Consumer Price Index (CPI) have gone up, in addition to the price of oil reaching record heights.

The PPI was released yesterday by the Department of Labor, showing an increase of 1.1%, seasonally adjusted.

The CPI rose 0.3%, seasonally adjusted.  From September to January, there was a total increase of 2.8%.  The steady consumer price increase paused last month, and last month’s increase adds up to a 3.1% rise in prices since September.

The price of oil spiked up to higher than $114 per barrel.  This record high of oil costs will begin to reflect in gasoline prices even more in the coming months.  The demands on gasoline in the warmer months will escalate the prices.  The decreasing value of the dollar is also contributing to rising oil prices.  Heating oil is also affected, but thankfully the weather is getting warmer.

The euro is rising to nearly $1.60.  Import costs will truly begin to take a toll on our already slipping economy.  Experts say that is the weakening of the dollar that is driving the price of oil higher.  The trade value of the dollar is not getting better, and the continued interest rate cuts are keeping the dollar from gaining strength.

Further rate cuts are expected nonetheless, which will mean more price increases, and continued dollar weakness.  The United States Federal Reserve is much more concerned with preventing a total credit crunch and maintaining liquidity in the financial markets.  Stimulating economic growth with liquidity injections and loosening credit with rate cuts is also taking away from the value of the dollar and escalating prices, especially for commodities like food and energy.

Is there an end in sight?  It will take the rest of the year to find out whether or not the recent moves were the right ones.  Will the economic stimulus package boost consumer spending as the government hopes it will?  That will take several months to find out as well.  Hopefully something will prove to be effective in helping to improve our economy.

On a global scale, food and energy costs have gone up, and it is starting to arouse concern in the minds of the finance leaders around the world.

World hunger continues to be a problem.  Many people are already aware of the millions of people who suffer starvation in many countries around the globe.  The cost of food has gone up even more in recent months with all of the tightening financial conditions in the United States.  Global economic difficulties stemming from the housing correction in the U.S. all have an effect on inflation in other countries.  World financial leaders are concerned that the poverty and hunger crises will worsen as a result of the already prolonged economic struggles.

While a majority of Americans are able to eat on a regular basis, there are still hungry people, even on the lands of the rich United States.  The problem of hunger is an incredibly harsh reality for those in other less blessed countries, particularly on the continent of Africa.

Energy costs are of course a major problem for penny pinching families in the United States, but at least many of these families have food even if they can only afford to get half of a tank of gas for their car.

The International Money Fund (IMF) and the World Bank are having a conference this weekend to address these and other pressing issues on the global economy.  Among the 185 nations represented, our own Treasury Secretary Paulson is active in these discussions.  He offered his comments on a need for some reform:

…IMF needs to sharpen its focus on: 1) exchange rate surveillance; 2) openness to international investment, particularly meeting policy challenges posed by sovereign wealth funds; and 3) supporting global financial market stability.  The Fund must also maintain its capacity to provide balance of payments support to countries in crisis, and to promote macroeconomic stability in low-income countries, while avoiding straying into the World Bank’s development mandate…

Secretary Paulson also made mention that the U.S. is making “vigorous” efforts in assisting the economic situation.

Jean-Claude Trichet, president of the European Central Bank (ECB) gave a press conference this morning after deciding not to cut the key interest rates because of inflation concerns.

In his statement to the press, Trichet stated,

The latest information has confirmed the existence of strong short-term upward pressure on inflation. In fact, we are experiencing a rather protracted period of temporarily high annual rates of inflation, resulting mainly from increases in energy and food prices. The latest information also clearly confirms our assessment of prevailing upside risks to price stability over the medium term, in a context of continuing very vigorous money and credit growth. The economic fundamentals of the euro area are sound.

Trichet seems confident in the real GDP growth of the Euro-economy, and feels strongly that maintaining price stability should remain the main focus.  He believes that while there is uncertainty and turmoil in the financial markets, this approach will help maintain the European economy.  He also noted that there is an unusually high level of economic uncertainty.

Some experts say that the ECB could afford at least a small rate cut.  They have been incredibly reluctant to do so.  Over the last twelve months, euro consumer prices have gone up 3.5%.  The euro is currently trading at 1.5825 dollars.

The ECB voted to keep the interest rates high, rather than take the approach of the United States Federal Reserve and continuously slash rates.

There is a small chance of a global recession occurring at this point.  Monetary policy makers all over the world are now under pressure to make the right moves to help their regional economies.  It is no longer a question of whether or not the United States will pull through “tough times,” but a question of whether or not a number of nations will be able to avoid recession.