Fed Keeps Rate at 5.25%; Says Inflation Is Still Main Concern

[swag]

Source: Bloomberg

Aug. 7 (Bloomberg) -- The Federal Reserve, keeping interest rates unchanged, said inflation is still the biggest danger to the economy while acknowledging that the economy may weaken.

``Although the downside risks to growth have increased somewhat, the committee's predominant policy concern remains the risk that inflation will fail to moderate as expected,'' the Federal Open Market Committee said today after meeting in Washington, where it left the benchmark rate at 5.25 percent.

Policy makers took account of threats to the economy's expansion while stopping short of saying risks are balanced between inflation and slower growth. Chairman Ben S. Bernanke and his team extended the longest freeze in borrowing costs in nine years, waiting to see how the decline in stocks and corporate bonds in the past three weeks plays out.

``Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing,'' the Fed said. ``Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.''



Read more: http://www.bloomberg.com/apps/news?pid=20601087&sid=a2t5YXoR9t3E&refer=home

[Tandalayo_Scheisskopf]

1. Mmmm...

Musta been a good batch of Resistol Hat Glue they were huffin' at that meeting.

[Hawkowl]

2. Guaranteeing a recession

Couple this with the drying up of credit in the imploding mortgage industry along with the unprecedentedly weak dollar, with the govt. flushing 400 billion a year down the toilet in Iraq and we are in for a major recession to coincide with the next election cycle. ENJOY!

[AX10]

4. It will be a deep recession too.

Bush and Company pissed away trillions of dollars on enhansing their rich friends via tax cuts, subsidies, and the MIC. There are very few choices that can be made now that will help the situation. A massive correction is needed.

[ProudDad]

26. Just in time for the Dems to deal with it (n/t)

[fedsron2us]

7. Credit markets are toast whatever happens.

High rates increase the problem of debt default which scares off borrowers but low rates mean a weaker dollar and higher inflation which is also hardly going to encourage foreign savers to invest their money in the US. A disorderly carry trade unwind might be even worse than the current sub prime fiasco. Bernanke is stuck between a rock and a very hard place.

[capi888]

3. Are they living in the REAL World....

oh yeah, they only hob nob with the super duper upper class...and the extremely wealthy...while 90% of the population is struggleing to buy gas and groceries. Soon to be living in boxes under the bridges...
:banghead:

[emilyg]

5. Amen.

[guitar man]

12. gas and groceries

two essentials convienently left out of inflation figures. I got a 3% raise in my salary last year. My actual cost of living for a family of 3 has gone up much more than that. You can see where that leaves us...:grr:

[skids]

24. If anything they should be raising rates...

...because inflation is cruising along at 2-3 times the official figures.

But then, who knows, this might actually be the "sweet spot" and the softest landing they can manage, given BushCo has flown us out over the ocean on bingo fuel and still won't turn the crate around.

[roamer65]

6. Bernanke knows the true inflation rate is around 10 percent.

That's why he's not backing off on interest rates.

[Demeter]

22. Then Bernanke Should Stop the Presses

and cut the growth of the money supply.

[tnlurker]

8. Back in the late 70's and early 80's

Wages were in an inflationary mode also. When prices went up wages went up. Maybe not as high but wages did keep up for a while. Now price inflation is 5-10 % and wage inflation is 1-2%. We are losing ground faster then I have ever seen it.

[roamer65]

9. It happens especially during war years.

Inflation was rampant during WW1. It got so bad that US banks would not redeem our own paper currency for gold coin, even though we were still on the gold standard. In the old Ottoman Empire, inflation was around 600% percent. Governments inevitably print currency to fund their wars, rather than increase taxes. Bush's war will be no different, IMO.

[Fleshdancer]

11. It seems like the Bush cult has different plans for these wars though...

I don't have the numbers for WWI, but in WWII the US spent 30% of its GDP. For Afghanistan and Iraq, we're spending 1% of the GDP BUT we're taking out loans from China to do that which means our children will be paying for these wars AND it will become far more expensive than any other war we have ever been in.

I still can't believe they cut taxes while also creating wars.

[roamer65]

14. Roosevelt's OPA and rationing actually helped...

to keep inflation in check during WW2. Inflation occured during WW2, but was not as rampant as the WW1 and Vietnam era inflations due to the very restrictive price controls. Even used cars had a maximum price set during WW2, if you could find one. OPA officials actually went to stores, posing as actual consumers, to make sure that their price controls were being obeyed.

What is killing us right now is the total deficit, caused by the taxcuts and war. When the national debt gets near yearly GDP (around 10 trillion) I expect to see a serious run on the dollar. We're nearing 9 trillion as we speak.

[Fleshdancer]

16. is the massive debt the reason why they won't lower the interest rate?

I'm trying to figure out why the interest rates weren't lowered exactly. Fear of high inflation or the inability to afford our massive debt? Or are those two concerns always a package deal?

I know the loud guy on CNBC fears that up to 7 million Americans could lose their home within a year at the rate we're headed but I don't know if he's over exagerating or if the feds think worse things will happen if the interest rates are lowered.

I found this earlier today which gave me the heebyjeebies:
(disclaimer: I'm not familiar with this source so if anyone knows it's junk, then let me know. It's also 3 yrs old. http://www.epinet.org/content.cfm/Issuebrief203)

The United States is currently borrowing $665 billion annually from foreign lenders to finance the gap between payments to and receipts from the rest of the world, an amount equivalent to $5,500 per American household. This borrowing entails serious costs for the U.S. economy. However, these costs have been hidden for the past few years, predominantly by the historically low interest rates, which resulted from the Federal Reserve’s attempts to spur economic recovery after the 2001 recession and from a downturn in domestic investment. This happy scenario will not persist indefinitely, and when interest rates rise, the costs of U.S. borrowing will have serious economic consequences:

• With no improvement in the current account deficit, the external debt of the United States will rise from 24% of total U.S. gross domestic product (GDP) at the end of 2003 to 64% by 2014.

• The cost of servicing just the additional debt incurred from 2004 to 2014 will rise to 1.7% of GDP by 2014, the equivalent of $250 billion in 2004 dollars.

Recent declines in the value of the dollar, while a welcome development, must be more broadly based among a larger cross-section of trading partners to bring the international accounts of the United States back into rough balance. Specifically, nations that actively manage the value of their currencies must allow the value of these currencies to rise vis-à-vis the dollar.

[roamer65]

17. The interest rate differential between the US, Japan and the EU...

is necessary to stop investors from dumping US Treasuries at this point. Bernanke drops interest rates and investors will dump US Treasuries and down, down will go the dollar. He's using the interest rate differential, at this point, to try to prevent a currency crisis. However, as the interest rate differential continues to narrow with Japan and the EU, the risk of a currency crisis grows. I expect eventual rate hikes, not cuts, for these reasons.

Boils down to this really. The more debt we float, the more interest we'll have to offer to attract investors to buy it and keep it. Therefore you are correct on the reason interest rates were not cut!

The Japanese yen is now literally a special beast. Bank of Japan rates are still near zero and Japanese banks have been lending trillions of yen to foreign investors, which has flowed into foreign equity markets. This is called the "yen carry trade" that I'm sure you have heard mentioned.
If the interest rate differential between the US and Japan narrows too much, all those yen go back to Japan, and that threatens to stop the "yen carry trade". If the "yen carry trade" shuts off, it will make the sub-prime mortgage crisis look like a picnic. Two things put the "yen carry trade" at risk, the interest rate differential narrowing and yen appreciation. This is why everyone is so nervous about the yen appreciating to 118 to the dollar.

[CGowen]

18. Some say the yen is also rising because investors are rushing to pay their cheap yens back

record capital inflow for Asia

Strong capital inflows, which reached a record $269 billion in 2006, had brought with them increasing pressures for currency appreciation and fast-rising asset prices, the bank said.
...
http://www.iht.com/articles/2007/07/26/business/adb.php

Japan may raise the rates this month

Japan's economy expanded 0.9 percent in the second quarter, according to a survey, fast enough to encourage the central bank to raise interest rates as soon as this month.

...

The report will be the last main indicator of the economy's strength before the central bank begins its next meeting to decide whether to raise its key overnight rate from 0.5 percent, the lowest among industrialized nations. Governor Toshihiko Fukui last month indicated he may be willing to raise borrowing costs ``even if the numbers are a bit weak.''

``Fukui has said he's prepared for a moderation,'' said David Cohen, director of Asia economic forecasting at Action Economics in Singapore. ``If GDP is consistent with the moderate growth that the BOJ has been talking about, and the financial- market turmoil cools down, I would expect them to raise rates.''

Expectations of a rate increase have rebounded since waning on July 27, when a global stock-market rout raised concern among investors that a worsening U.S. housing slump would slow growth in Japan's largest export market.

http://www.bloomberg.com/apps/news?pid=20601091&sid=aelhk8DV9VFk&refer=india

[roamer65]

19. The BoJ will eventually have to increase interest rates...

and then we'll find out exactly what interest rate levels will cause the carry trade to reverse...Yikes.:yoiks:

The information in the articles you are citing could very well be the "tip of the iceberg". A 118 yen may be causing some to panic and pay off their yen loans.

[Fleshdancer]

20. thank you so much for the clarification...

I was looking for this type of information on the web yesterday and a little today but most sites dump a load of information without really explaining how everything relates to one another. Thank you for helping me grasp the big picture.

The yen carry trade is interesting too. Is 118 the breaking point or is that what we're at right now? Do you think it will shut off or will what happened today give us a chance to widen the interest rate differential enough to keep the markets stable? If Japan can't really go much lower and we can't go lower, then I assume one of us will have to go higher soon?

[roamer65]

21. I wish I could tell you the "yen carry trade" reversal point.

Then I'd be a billionaire like George Soros! Soros made much of his money on "Black Wednesday", when he helped to drive the British pound out of the EU's Exchange Rate Mechanism in September, 1992.

The yen-dollar exchange rate is currently around 118-119 to the dollar. My personal belief is that all that yen will eventually flow back to Japan, and our markets will eventually fall as a result. Let's hope its an orderly fall and not an uncontrolled "unwinding".

You're right, most financial news services only give "blurbs", sad to say. But hang around DU and you will learn a lot on these topics.

[NeoConsSuck]

23. It's right on schedule

we're soon to be the largest banana republic in the world. A two-tier economic society.

The have-mores and the have-nots.

[alcibiades_mystery]

10. Cramer must be catching an infarction

:rofl:

Mad Money will be mus viewing today, for high comedy

[CGowen]

15. Armageddon, because his people are losing their jobs

http://bigpicture.typepad.com/comments/2007/08/cramer-pleads-f.html

[skids]

25. Don't believe it...

...while I'd love to see his ilk squirm in financial agony, it's a put-on. Anything that guy does in the public eye is a lie on at least six levels. He's shorting something and wants to make sure there's enough panic for the financial meltdown to spread into whatever it is he's got his teeth into.

Not that it isn't a catastrophy, just that he knows how to make money off it, and wants it as big as possible.

[Odin2005]

13. Of course they're worried about inflation, the real inflation rate is like 8% to 10%