Fed interest rate hike? Ask Starbucks, GM and your Realtor

Plenty to talk about, but nothing to do.

That should sum up the proceedings at the Federal Reserve's midsummer meeting Tuesday.

Wall Street expects no change in the Fed's benchmark short-term interest rate, now 2%, even though central bankers from Turkey to Mexico to India, and many points in between, have been raising rates in recent months to battle inflation.

Fed Chairman Ben S. Bernanke & Co. are likely to keep talking a good game about being inflation-vigilant, but they aren't going to back up the talk with a rate hike any time soon -- not in an economy that has experienced seven straight months of net job losses.

Besides, one argument for a steady Fed is that the source of our current inflation trouble isn't excess U.S. demand for stuff, but rather waning global supplies -- of oil, of course, and of grains and other commodities.

Many developing economies, such as India, still are growing rapidly enough that tighter credit engineered by their central banks may actually curb inflation by slowing demand.

But what demand would the Fed be seeking to slow by raising interest rates? Demand for houses? Already been there, done that. Ditto for cars, recreational vehicles, boats, home appliances, Starbucks coffee, etc.

What's more, some analysts see much tougher times ahead for U.S. consumer spending, with the tax rebates now history.

Given the dismal employment story (463,000 jobs lost this year, and a July unemployment rate of 5.7%, a four-year high), along with the shrinking availability of credit as lenders continue to retrench, Goldman, Sachs & Co. economists now ominously forecast that consumers' cash flow and spending will decline in the second half of this year.

That brings us back to the Fed: Even if, in their heart of hearts, policymakers would prefer to tighten credit, they can clearly see that the financial system already has beaten them to it. Absent a sudden inflation-fueled jump in long-term bond yields or a collapsing dollar, the Fed seems to have nothing to lose by staying on hold for now.

Photo: The Fed's headquarters building in Washington. Brendan Smialowski

Comments

[Jeff%20S]

Oh please!

Whose PR machine have you been listening to?

Nothing to lose?

Nothing to lose but to further devalue the dollar, further eroding consumer buying power, further weakening confidence leading to strengthening of the tiny bout of stagflation we currently have.

That is the thinking that led us to the 70s and the failure of the fed to ignore these kind of pleas is exactly what gets us there.

By the way, Wall Street has not already done the Fed's work. If it had long rates would be much higher, the curve would be steeper and the banks would be better off.

[martscan]

Classic "horns of a dilemma."

[Andy]

It's choosing the lesser of 2 evils. Inflation or a recession. I agree the Fed is going to try and stave off the recession first by managing the credit crunch (and hence no interest rate rise). However longer term inflation could go out of control and be much more damaging. I see no rise this time around, but would not be surprised with 50 basis point hikes towards the end of the year. Retailers are in a tough position no matter what - Lose sales now or in the the holiday sesason.

[Matt Bauer]

I have to agree. I do not see how raising interest rates will lower the price of oil and it is the price of oil that is behind the raising costs. MB

[Jim]

One of the main reasons oil is so expensive -- and therefore one of the main reasons we have inflation despite the recessionary economy -- is that the Fed's "print more money" policy of low interest rates and easy loans is devaluing the dollar. When you look at the price of oil compared to "monetary" commodities, such as gold, it's actually relatively stable. So if the Fed were to raise interest rates (which, I concur, is unlikely) and restore international confidence in the dollar, we could stabilize prices domestically, and pull ourselves out of the inflation-induced recession. Frankly, Starbucks, GM, and the real estate industry made their own pain (by over-expanding, not diversifying the product line, and encouraging a bubble, respectively) so I have very little sympathy.

[NObama]

Maybe, for just a minute, not worry about the crying refi babies and do what's in the best long term interest of the USA. While we're at it, make our import duties and associated fees match those of other countries.

[Simpleton]

The price of oil is NOT what is behind rising prices, Matt. The devaluation of the dollar and the accompanying rise in money supply is the culprit there.
The price of oil will drop, the stock markets will drop (a lot), and once the traditional fools figure things out gold will already be over $1,000 per ounce on its way to the moon.

[martscan]

Recessions are as inexorable as the tides...and when this one is accepted and allowed to run its course, the Fed will throw in the towel and begin attacking the insidious danger of inflation. Ooh, I can't wait to short the 30 yr Treasuries.

[martscan]

Matt Baer:

Don't you think a certain part of the increased price of oil, a storable commodity, can be attributable to the value of the dollar vis-a-vis other currencies? I do. And, if this is the case, wouldn't it follow that a rising dollar would be reflected in decreased oil prices? I think it would. Further, general economic conditions, earnings, etc., aside for the moment, wouldn't equities be expected to rise with the resultant lower energy costs.. airline and shipping companies come to mind. And, with a bullish outlook in equities, there would be no rush of 'flights of safety' into bonds or inflationary hedges such as the traditional yellow metal, gold. Of course, as Agathe Christie was wont to say, "things aren't always as they seem."

[trytothink1st]

Paulson (or Bernanke?) slipped 10 days ago when they mentioned that currency intervention is a serious step to take...

But look at the dollar since then!!!

Better not bet against the Fed, EU, et.al....

But WHEN the market breaks the intervention!!!! LOOK OUT BELOW!!!