June 26, 2008

Fed Holds Rates Steady

Yesterday, The Federal Reserve (The Fed) held short term interest rates steady at 2%. This is a move that most economists predicted, and where we move from here is a matter of discussion.

On one hand, the economy does not seem to be on the verge of recession as earlier in the year, but it has still not picked back up. The Federal Stimulus checks have gone out, but they have not shown up in much of the data thus far. Additionally, the June unemployment report surprised everyone with a jump to 5.5% versus the May 5.0% report. These items have more than a few economists predicting that we are currently pausing, but we may need more cuts.

On the other hand, we have seen inflation rise. The Fed's statement was focused on discussing the rise in inflationary pressures that usually means a rise in rates in the not too distant future. The vote today was 9-1 with the 1 being for a rise in rates. Most economists believe that we are currently pausing before a rise in rates some time between this fall and next spring.

The market responded favorably to the news of the steady rates, and commodities across the board dropped with oil giving up more than $2.50 to $134.50 prior to the closing.

Several mutual fund managers discussed inflation as being some thing that The Fed could not really target. They stated it is the growth from India and China that is really to blame for pushing up prices due to production not being able to keep up with demand. When the global economy starts to catch up, inflation will taper off.

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