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Economics & Research Blog

Fed Decides that Doing Nothing is Just Right

The Fed is stuck between a declining housing and construction sector,

By Dr. Joe Webb
Published: May 9, 2007

The Fed is stuck between a declining housing and construction sector, and rising prices for other goods and services. While they'd love to do the stereotypical economist's "on one hand... and on the other hand..." approach, they unfortunately have only one interest rate to adjust, and even that's not as powerful as it used to be in a world economy where U.S. influence is gradually declining. Today, the Fed left rates exactly where they've been. The full Fed statement can be read online. But here are the critical excerpts.

Economic growth slowed in the first part of this year and the adjustment in the housing sector is ongoing... the economy seems likely to expand at a moderate pace... Core inflation remains somewhat elevated... the high level of resource utilization has the potential to sustain those pressures... the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected.

When they refer to resource utilization, they are referring to capacity utilization in U.S. factories being at levels that have been considered inflationary. That level is usually 80%. Yes, the supposedly dying U.S. manufacturing sector is so busy any further growth might be inflationary. Somehow, that's not reported in the business press, but that discussion is for another day. So it's clear that when you're being pulled in opposite directions, just sit back and let them fight it out. Somehow it reminds me of the old Texas proverb, "there's nothing in the middle of the road except a double line and a dead armadillo."

Dr. Joe Webb is one of the graphic arts industry's best-known consultants, forecasters, and commentators. He is the director of WhatTheyThink's Economics and Research Center.



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