|
By Michael Kanell
Atlanta Journal-Constitution
Saturday, October 26th, 2006
The Federal Reserve's elite committee on Wednesday voted to leave the benchmark interest rate at 5.25 percent, hoping it is high enough to head off inflation but relaxed enough to allow growth.
The widely expected decision was the third consecutive stand-pat meeting, a sign that the Fed sees the economy angling toward a "soft landing," avoiding recession before starting solid growth.
"That is what the Fed believes, and I have to say I am sympathetic to that story," said economist and Fed-watcher Tim Duy of the University of Oregon. "But what I think the Fed is trying to tell us is that we are coming into a soft landing with high, underlying inflation rates."
As the economy slowed into recession in 2001, the Fed began a series of cuts that took rates to four-decade lows. When job growth reignited, the Fed reversed course and began a two-year campaign of rate increases.
It lifted the benchmark rate to 5.25 percent in June, then paused, watching the data.
Now, the "core" measure of inflation — food and energy prices are stripped out — remains "elevated," said the Fed in an accompanying statement.
That might argue for another rate increase, which would slow the economy, making it more costly for companies and consumers to borrow money.
In its statement, the Fed acknowledged that economic growth has been slowing, "partly reflecting a cooling of the housing market."
But unlike some economists, Fed officials believe the chill in housing won't give the rest of the economy a cold. "Going forward, the economy seems likely to expand at a moderate pace," the Fed statement said.
Fears of recession are pegged to the slowdown in what had been a red-hot housing sector. For several years, residential real estate virtually carried the economy, accounting for millions of jobs, from construction to mortgage lending.
Rising home values and low interest rates also have let homeowners trade equity in their homes for more than a half-trillion dollars a year. That money fueled consumer spending — but real estate has slipped badly: Sales of existing homes last month fell 1.9 percent, while the median price of homes also dropped, the National Association of Realtors reported Wednesday.
Only the South showed improvement: Sales were up 0.4 percent, and median prices rose 3.6 percent.
Nationally, sales have fallen every month since March. However, the drop in mortgage applications seems to have leveled off, which could mean the market is near a bottom.
Housing's retreat has been dramatic, but so far it has been orderly — and the worst of the rout has been limited to a few regions.
It is still too soon to see the full impact, said Emily Sanders, president and CEO of Sanders Financial Management in Norcross. "I don't think housing is going to derail growth in the economy. I'm not ready yet to declare a soft landing — nor a hard one."
The Fed vote was 10-1 for the status quo: Only Jeffrey M. Lacker, the Fed governor from Richmond filing his second straight dissent, argued for another rate increase.
While Lacker was out-voted, it would be a mistake to assume that rates must go downhill from here, Sanders said.
"Actually, I do agree with Lacker," she said. "I'm not really a hawk. I just don't think it would take much to ignite inflation."
Fears of inflation have been based on the impact of higher energy prices and the possibility that a tight labor market would force employers to start ponying up high raises.
Both of those factors could ripple through prices, setting off a wave of inflation.
Thus far, most companies have managed higher energy costs without raising their own prices. And since late summer, oil prices have been falling — which should remove much of that pressure.
And while inflation-adjusted wages have been flat or falling, there are some signs that the long-dormant cost of labor is stirring.
Perhaps the economy has simply not slowed enough to control price increases, Duy said: That could force the Fed to choose between permitting runaway inflation and tipping the economy into recession.
The Fed has typically seen inflation as the greater villain, he said. "If we do get a hard landing, I think it would be because the Fed had to raise rates to contain inflation."
But history argues that the Fed is about to switch enemies — from inflation to recession, said economist Kashif Mansori of Salem College, author of The Street Light blog.
"Every single time in the last two decades that the Fed has paused more than 100 days after a rate hike, the next move has been a rate cut," he said. "Of course, there's a first time for everything, but I tend to think that this won't be that time."
|
