Economics & Research Blog
Yawwwwwnnnnn..... Fed Doesn't Move
The Federal Reserve left rates unchanged today.
By Dr. Joe Webb
Published: August 7, 2007
The Federal Reserve left rates unchanged today. Their statement reiterated their concerns about inflation and added comments about stock market swings and credit problems. They still see the economy as growing with price pressures remaining.
The Fed is in an odd situation. If they lowered rates, the markets would be panicked because that would mean the Fed felt that credit problems were so damaging to the economy that they were about to cause a recession. If they raised rates, that would be a clear sign that the economy is overheating and that prices were going out of control. If they left rates alone, they were clearly out of touch with the credit problems and inflation. Strangely, the banking system is guilty of creating both of these problems, but that's a discussion for another day.
The Fed's decision was not a surpise to anyone. The fact that this is a lack of supply of goods in relation to demand means that the real problem is the speed and depth of investment in production, something that will probably be cured in non-US markets in about 2-3 years, whether the Fed acts or not.
In the meantime, I still believe that the Fed is very happy with the chaos in the credit markets because it is doing what the Fed could not do: stop the unwarranted issuance of credit to credit-risky borrowers. These are best punished by market forces, which is in process right now. The Fed is no longer as effective in managing money as it was even a decade ago. Their actions, as seen in their policy over the past two years have shown little impact on long-end interest rates, which are the ones that they have been trying to push up. Since they have some control only short rates, long rates have had to follow by indirect effects of Fed actions.
This is yet another situation that we navigate as managers. If credit risky customers, which are often small businesses, are temporarily pushed out of the market, it could cause capital investment expenditures to slow. This bears careful attention as we are about a month away from the most important capex event in our industry, Graph Expo.