The Fed strives for balancing act
With GDP numbers at 0.6% annual growth, the Fed must carefully balance slow growth with inflation to avoid stagflation. Bob Moon talks to economist Joel Naroff about what the Fed is up against.
Traders work on the floor of the New York Stock Exchange January 28, 2008 in New York City. (Mario Tama/Getty Images)
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KAI RYSSDAL: Interest rate announcements from the Federal Open Market Committee usually work something like this. Everybody gloms onto the headline number right away, whether it's a move down or a rate hike. They buy or sell depending on what their gut tells them. Then they take a minute and read the statement that goes along with the number. That's what happened today, and it turned what had been a fairly positive reaction to today's announcement, squarely on its head.
The headline number was a half point cut in the federal funds rate, right about what everyone had been expecting, but then Mr. Bernanke and his colleagues took away the punch bowl. The statement had words like "deepening of the housing contraction," "financial markets under considerable stress," and "downside risks to growth." In a way you couldn't blame them for laying it on the line, because earlier this morning we got the number for fourth quarter gross domestic product.
Marketplace's Bob Moon takes it from there.
BOB MOON: A reading of just .6 percent annual growth may sound dismal, but Commerce Bank chief economist Joel Naroff argues the slowing pace was mainly a reflection of the housing market and businesses adjusting their inventories. Otherwise, he says households and businesses continued to spend. He says that's keeping monetary policy makers guessing, and probably crossing their fingers as they cut rates again today.
JOEL NAROFF: The Fed is worried about going too far, too fast, in an economy that could pick up steam by the middle of the year, and generate more inflation. So the Fed's in a very, very difficult position right now.
But before getting lost in the fairy tale world of Goldilocks carefully trying to turn up the heat just right, some stock market strategists say the Fed has to focus on first things first. Georges Yarad at Yarad Investment Research.
GEORGES YARAD: We're never going to have a perfect scenario. They have to do the real balancing act, and I think right now the more pressing problem is the actual "R word," is recession, and I think they want to delicately move the economy forward, away from that, and then I think that any potential threat of inflation can then be addressed after that.
Today's statement says the Fed committee expects inflation to "moderate in coming quarters," but also says "it will be necessary to continue to monitor inflation developments carefully." Economist Joel Naroff says with any luck the Fed won't have to worry about the dreaded combination of weak growth and inflation known as "stagflation."
NAROFF: Really the inflationary pressures tend to ebb as the economy slows. If indeed the economy does slow, I think the inflationary pressures that are out there will not be as great as they had been.
That's just one possible happy ending that's yet to be written.
In Los Angeles, I'm Bob Moon for Marketplace.
