Fed dilemma: Raise or lower rates?
Today's report that inflation at the consumer level shot up more than 1% last month, due mostly to skyrocketing energy prices, puts the Federal Reserve in a tough spot. Jeff Tyler explains.
Federal Reserve Chairman Ben Bernanke testifies during a hearing before the House Financial Services Committee on July 16, 2008. (Alex Wong/Getty Images)
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KAI RYSSDAL: Great to have you with us on this Wednesday. It's the 16th of July. Which by my count makes it four out of the last five business days that the chairman of the Federal Reserve has led the news. Although for a change it had nothing to do with the woes of Fannie Mae and Freddie Mac. More about those in a minute, by the way. No, Mr. Bernanke spent a lot of time today talking to Congress about prices. This morning the Labor Department told us inflation at the consumer level shot up more than a percent last month. The worst-kept secret in economics is that skyrocketing energy prices deserve much of the blame for that. But no matter the reason why, today's report puts the Federal Reserve in a tough spot. Marketplace's Jeff Tyler explains.
JEFF TYLER: Economists expected to see signs of inflation in today's report. But not like this. Food prices were up almost 1 percent in June. Gas prices rose 10 percent.
HUGH JOHNSON: Certainly they're a surprise. They're stronger than expected.
That's Hugh Johnson, chief economist at Johnson Illington Advisors.
Johnson: If ever there was a time when I did not want to be chairman of the Federal Reserve, it's right now. They obviously are faced with a very severe problem.
On the one hand, the economy remains sluggish. That, combined with the credit crisis, would normally motivate the Federal Reserve to lower rates, making it easier to borrow. But with prices going up, the Fed must also consider raising rates to curb inflation.
Chris Low, chief economist with FTN Financial, says the Fed is torn.
CHRIS LOW: The way they've sort of settled this is that they're probably not going to do anything for a year or so. They'll just sit frustrated on the sideline, putting out brush fires like Bear Stearns and Fannie Mae.
Others suggest the Fed may raise rates sooner. Hugh Johnson says the problem is not just inflation, but the fear that it will get worse.
Johnson: We're worried about higher inflation, and that sometimes creates a self-fulfilling component, where we might see higher prices just simply because we're so worried about it.
As if there weren't enough to worry about already, today the Labor Department also reported a big dip in wages and salaries. Adjusted for inflation, income fell almost 1 percent last month, the steepest decline in 24 years.
I'm Jeff Tyler for Marketplace.
Comments
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From Los Angeles, CA, 07/17/2008
I've never understood, when inflation is caused by oil becoming more expensive, why is it supposed to be cured by money being made more expensive?
From Columbus, OH, 07/17/2008
I've lived in Ohio for decades now. I know the people well. Everyone single last one of us have been effected and it's been painful. We've had to pack up and ship off our lively hoods, and now, we park our vehicles. Winter is looking like it's going to be very different this year.
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