Fed Implies Increase in Benchmark Rates

Policy makers of the Federal Reserve hinted on the eventual increase of interest rates to counter rising inflation but a definite timetable has not been set so far.  

Rates Adjustment Dependent on Economic Outlook

The minutes of the Fed meeting in early August showed that its members have not come up with a clear agreement on the schedule of the possible readjustment of the rates benchmark.  The Fed’s stance will primarily depend on the general economic outlook and developments in the financial market as these would affect growth and inflation movements.  

Policy makers however restrained their official comments which strengthened the general sentiment at Wall Street that the Fed is on a wait and see stance, closely watching the emerging trends on commodity prices.  All indicators point to a possible increase of the rates rather than lowering them.

The fall of oil and energy prices in the recent weeks did nothing to moderate inflation which is spiraling up at a vigorous pace.  The Fed is extremely worried that domestic inflation could get worse which will likely push them to implement tighter fiscal policies.  However, the general of the August meeting was optimistic as Fed officials continue to believe that inflation next year will cool down.

Looking Forward to 2009

Official analysis anticipates a slowing economy that could spill over to the next quarter and economic activities would be characterized by sluggish movements.  Positive gains for the economy could come much later, predicting a growth sometime in mid-2009.

The minutes pointed out several problem areas such as volatile employment situation, weak consumer and business confidence, unstable financial position, and shrinking domestic manufacturing.  Despite all these woes however, the bankers cited an unexpected growth of the economy from April to June.  During this period the recorded growth was more than the expectations of many bankers.

Policy makers are focusing their concern on the housing market meltdown, tighter credit market, and worsening financial conditions.  These areas could slow down the US economy further.

Inflation, the Bigger Problem

Other Fed officials however are more concerned about the continued rise of inflation. Officials said that Americans might become used to higher commodity prices thus making it difficult combat inflation in the long term.

After the August policy meeting, the general consensus in the Fed is to hold the benchmark at current levels.  Dallas Federal Reserve chairman Richard Fischer however disagreed on the policy saying the he preferred to raise rates immediately.  

Fischer contend that rising inflation pose significant threat to the economy as industries will certainly pass the burden of rising costs imported materials and energy by increasing prices of products.   Many investors, hoping the Fed will increase the benchmark rates, are expecting the adjustment sometime next year.