Credit Markets Remain Weak As Federal Reserve Keeps Rates Steady
As expected, the Federal Reserve didn’t make any changes to interest rates at this month’s Open Market Committee meetings. In it’s news release, it cited weak credit markets though it is still concerned with the threat of inflation.
Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.
Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.
Financial markets remain fragile as more writedowns are expected and mortgage markets continue to deteriorate. It is looking increasingly likely Freddie Mac may be forced to use the government’s rescue plan sooner than expected, having reported large second quarter losses this week.
The good news is that oil prices have continued to fall this week and have shed about $30 from it’s high in mid July. Increased output from Saudi Arabia and decreased global demand from slowing economies have finally made a dent on oil’s meteoric rise over the past year.
Only a single member of the Open Market Committee, Richard W. Fisher, voted to raise the Federal Funds rate this month. If oil prices can stay around this level it would take a lot of pressure off the Fed to raise rates and give more time for financial markets to stabilize.
