Will they or won’t they? That seems to be the hotly-debated question as the Federal Reserve wraps-up a two-day policy meeting today.
There’s already some dissension within the rate setting Federal Open Market Committee (FOMC) with some members voting in recent meeting to hold the line on further interest rate cuts, or even talking about the need to raise rates to combat inflation.
Inflation worries are leading to lots of lost sleep these days for global central bankers. In fact, the European Central Bank may actually raise rates at its July meeting.
The trouble is, higher interest rates don’t do much to combat this kind of inflation, which involves mainly soaring food and fuel costs.
Headline inflation in food and energy prices has so far not spilled over into rising wages, the biggest input cost for most businesses. The reason is a globalized economy that has made labor markets much more flexible.
In fact, employment in the U.S. is already on the decline. Consumer and business confidence in both the U.S. and Europe has already fallen to the lowest levels in years, if not decades.
The Fed must continue to “talk tough” on inflation, if for no other reason than to keep the dollar from free-fall. The U.S. dollar is down about 40% this decade alone against a basket of world currencies. This fact has as much to do with rising oil and other commodity prices than global supply-demand imbalances.
Talk is cheap, but I expect the Fed to stick with a war-of-words against inflation – rather than a major policy shift. The latest housing data show foreclosures up over 40% last month – with bank repos of now abandoned homes nearly doubling.
With continued pressure on housing, consumer confidence at record lows, and employment falling, the Fed is not likely to begin raising interest rates.
I expect the FOMC to hold the line on interest rates today, but continue to talk tough about inflation. The Fed’s bark is worse than its bite.
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