Fed holds rates, citing growth risk
RAMYA JEGATHEESAN AND KEVIN CARMICHAEL
Tuesday, August 05, 2008
WASHINGTON and OTTAWA — The U.S. Federal Reserve has upgraded the risk to the economy of slower growth, marking a retreat from its rosier June outlook when it was much more worried about the threat of inflation.
All but one of the 11 members of the U.S. central bank's policy-setting committee voted Tuesday to leave the Fed's benchmark lending rate at 2 per cent.
In a statement released in Washington, the Federal Open Market Committee, led by chairman Ben Bernanke, had little positive to say about the immediate prospects for the world's largest economy, suggesting interest rates will remain unchanged into 2009.
The Fed looked past the second-quarter growth figures for the United States, which showed gross domestic product expanded thanks to a burst of consumer spending sparked by the government. The Fed statement said the collapse of the housing market and higher energy prices “are likely to weigh on economic growth over the next few quarters.”
Gone from Tuesday's assessment was the optimistic notion from the previous interest rate decision in June that “although downside risks to growth remain, they appear to have diminished somewhat.”
At the time, that left many economists thinking that the Fed's biggest concern was keeping a lid on bubbling consumer prices.
The shift in tone in yesterday's statement suggests Mr. Bernanke finds himself in the same jam as his counterparts in Europe and Canada: Forced into neutral by a declining domestic economy and rising inflation.
“The Fed is in a very, very bad jam,” said Dustin Reid, an economist at ABN Amro in Chicago. “The bias before was a hike in interest rates this year. Given this statement, there is now more a bias to do nothing this year rather than a hike.”
Since September, the Fed has been cutting interest rates in attempts to soothe an economy troubled by a credit crunch, soaring food and fuel prices, and a housing market still reeling from the subprime mortgage crisis.
June's meeting marked the first time the Fed voted not to cut interest rates since the fall.
Tuesday's almost unanimous vote among Fed members surprised some economists because several members had expressed concern about inflation in the weeks leading up to the decision. Dallas Fed president Richard Fisher, who has raised alarms over inflation in speeches, voted in favour of a rate increase, marking his fifth dissenting vote this year.
Inflation hawks such as Mr. Fisher cite recent numbers showing that inflation hit a 27-year high in June, and that consumer prices have been hit hard: Prices spiked 5 per cent between June, 2007, and June 2008, with inflation rising to 0.8 per cent in June alone, according to the U.S. Department of Labour.
“You've got to go back to 1982, in the midst of the stagflation that followed the second OPEC oil shock, to see the last time American inflation was clocked at that kind of pace for any sustained period,” Jeff Rubin, chief economist for CIBC World Markets, said in a July 30 inflation report.
But the broader economic picture has also continued to deteriorate.
The ranks of the unemployed have swelled by 1.6 million people over the past year as the jobless rate climbed to a four-year high in July, according to the U.S. Department of Labour.
The Bank of England and the European Central Bank are to follow the Fed with interest rate announcements later this week, and economists surveyed by Bloomberg News predict both institutions will leave borrowing costs unchanged.
In Britain, officials are trying to cushion the blow of their own housing crisis, while ECB president Jean-Claude Trichet must contend with slowing growth in Germany and other countries brought on by weaker U.S. demand for exports. Both central banks are trying to contain inflation that has breached their targets.
The Bank of Canada left its benchmark lending rate unchanged at 3 per cent last month, citing continued weakness in the U.S. economy, turbulence in global financial markets and a “sharp” increase in commodity prices.
RAMYA JEGATHEESAN AND KEVIN CARMICHAEL
Tuesday, August 05, 2008
WASHINGTON and OTTAWA — The U.S. Federal Reserve has upgraded the risk to the economy of slower growth, marking a retreat from its rosier June outlook when it was much more worried about the threat of inflation.
All but one of the 11 members of the U.S. central bank's policy-setting committee voted Tuesday to leave the Fed's benchmark lending rate at 2 per cent.
In a statement released in Washington, the Federal Open Market Committee, led by chairman Ben Bernanke, had little positive to say about the immediate prospects for the world's largest economy, suggesting interest rates will remain unchanged into 2009.
The Fed looked past the second-quarter growth figures for the United States, which showed gross domestic product expanded thanks to a burst of consumer spending sparked by the government. The Fed statement said the collapse of the housing market and higher energy prices “are likely to weigh on economic growth over the next few quarters.”
Gone from Tuesday's assessment was the optimistic notion from the previous interest rate decision in June that “although downside risks to growth remain, they appear to have diminished somewhat.”
At the time, that left many economists thinking that the Fed's biggest concern was keeping a lid on bubbling consumer prices.
The shift in tone in yesterday's statement suggests Mr. Bernanke finds himself in the same jam as his counterparts in Europe and Canada: Forced into neutral by a declining domestic economy and rising inflation.
“The Fed is in a very, very bad jam,” said Dustin Reid, an economist at ABN Amro in Chicago. “The bias before was a hike in interest rates this year. Given this statement, there is now more a bias to do nothing this year rather than a hike.”
Since September, the Fed has been cutting interest rates in attempts to soothe an economy troubled by a credit crunch, soaring food and fuel prices, and a housing market still reeling from the subprime mortgage crisis.
June's meeting marked the first time the Fed voted not to cut interest rates since the fall.
Tuesday's almost unanimous vote among Fed members surprised some economists because several members had expressed concern about inflation in the weeks leading up to the decision. Dallas Fed president Richard Fisher, who has raised alarms over inflation in speeches, voted in favour of a rate increase, marking his fifth dissenting vote this year.
Inflation hawks such as Mr. Fisher cite recent numbers showing that inflation hit a 27-year high in June, and that consumer prices have been hit hard: Prices spiked 5 per cent between June, 2007, and June 2008, with inflation rising to 0.8 per cent in June alone, according to the U.S. Department of Labour.
“You've got to go back to 1982, in the midst of the stagflation that followed the second OPEC oil shock, to see the last time American inflation was clocked at that kind of pace for any sustained period,” Jeff Rubin, chief economist for CIBC World Markets, said in a July 30 inflation report.
But the broader economic picture has also continued to deteriorate.
The ranks of the unemployed have swelled by 1.6 million people over the past year as the jobless rate climbed to a four-year high in July, according to the U.S. Department of Labour.
The Bank of England and the European Central Bank are to follow the Fed with interest rate announcements later this week, and economists surveyed by Bloomberg News predict both institutions will leave borrowing costs unchanged.
In Britain, officials are trying to cushion the blow of their own housing crisis, while ECB president Jean-Claude Trichet must contend with slowing growth in Germany and other countries brought on by weaker U.S. demand for exports. Both central banks are trying to contain inflation that has breached their targets.
The Bank of Canada left its benchmark lending rate unchanged at 3 per cent last month, citing continued weakness in the U.S. economy, turbulence in global financial markets and a “sharp” increase in commodity prices.
