Tuesday, August 5, 2008

Fed Leaves Rates Unchanged

The Fed met today and made no changes to the key Fed Funds Rate. The Fed Funds Rate is an overnight bank lending rate used as a benchmark for many types of consumer loans as well as certain business loans. It's the second month in a row that the Fed has left this rate unchanged at 2%.

The move was widely expected, as the Fed battles not only the housing downturn but inflationary fears. The common wisdom is that the Fed raises rates to fight inflation, and cuts them to boost the economy. As Ben Bernanke and his peers attempt to fight both at once it's like a trip back in time to the stagflation of the late 70's.

The PPI and CPI (Producer and Consumer Price Indices) have been moving steadily higher in recent months, led by the steep increases in food and energy costs. Even though the official PPI & CPI number factor out volatile food and energy prices, increases in these areas have hit middle America hard.

Meanwhile, the housing downturn (fueled by the credit crunch and the subprime mortgage debacle) has been dragging down the entire US economy. Seventy percent of the US economy is driven by consumer spending. As America's love affair with the "house-as-ATM" idea has come to an end, so has boom-time consumer spending on everything from vacations to home improvements to 'affordable luxury' items like $200 spa facials and $750 flat panel TVs.

The Fed's next scheduled meeting is September 16. Most analysts expect rates to again remain unchanged at that time, barring another huge bank failure like IndyMac or another dustup in the Fannie Mae / Freddie Mac lending world.

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