Even in the face of rising inflation, the Federal Reserve is unlikely to raise their target interest rate through the end of 2008, based on comments Friday from Fed Chairman Ben Bernanke.
“The Federal Open Market Committee (FOMC) has maintained a relatively low target for the federal funds rate despite an increase in inflationary pressures,” Bernanke said in a speech at the annual economic symposium in Jackson Hole, Wyoming. He explained that this strategy is based on the Fed’s expectation “that the prices of oil and other commodities would ultimately stabilize… and that this outcome…would foster a return to price stability in the medium run.”
Bernanke went on to say that he is encouraged by the “recent decline in commodity prices, as well as the increased stability of the dollar,” and that, if the Fed does not interfere by increasing its interest rate, these conditions would lead to a better pace of inflation by the beginning of next year.
During the past year, the Federal Reserve has decreased its federal funds rate from 5.25 percent to 2 percent, in response to meltdowns in the financial and mortgage markets. Yet because of lower interest rates as well as soaring oil and food prices, consumer inflation has risen from 2 percent to a rate of 5.6 percent during the same period.
In order to get inflation under control, some on the Fed board say an increase in the target rate is the only solution. “If we don’t reverse our accommodative stance sooner rather than later, we will face rising inflation, which may be costly to deal with,” Philadelphia Federal Reserve Charles Plosser said in an interview published Monday in the New York Times.
Still others support Bernanke’s position, saying that most economic players, particularly mortgage lenders and bankers, are not ready for a rate hike. Janet Yellen, president of the San Francisco Fed argued, “Lenders have been hit by a shock so severe that they are contracting and withdrawing from private sector lending.”
The FOMC meets again in mid-September to determine if any interest rate changes are necessary.