Fed Concerned About Growth and Inflation

Joe Stevens, vice president of floor operations for Credit Suisse, looks at television monitors in his booth on the floor of the New York Stock Exchange as the Fed Interest rate decision is announced, Wednesday, March 21, 2007. The Federal Reserve left a key interest rate unchanged at 5.25 percent on Wednesday while taking note of the recent weaker economic performance and higher inflation pressures. (AP Photo/Richard Drew) (Richard Drew - AP)

Concerns about a downturn, heightened by comments from former Fed Chairman Alan Greenspan and growing troubles among mortgage lenders, helped trigger a 416-point drop in the Dow Jones industrial average on Feb. 27.

The Fed did not cite the market turbulence in its statement, but it did note that recent economic indicators have been "mixed," a downgrade from the Fed's view at the January meeting that recent indicators showed "somewhat firmer economic growth." It also said the correction in the once high-flying housing market was still "on-going" while in January Fed officials had detected "tentative signs of stabilization" in housing.

In the new statement, the Fed also showed greater concerns about inflation, noting that readings on core inflation, which excludes energy and food, had been "somewhat elevated" recently, a comment that reflected the bigger-than-expected increases in consumer and wholesale inflation reported last week.

The Fed continued to stress that its "predominant policy concern" remained the risk that inflation will not moderate as expected as the economy slows.

Analysts said economic developments have left the Fed trapped between the opposing forces of a weakening economy and rising inflation.

"The Fed is caught right now. The inflation numbers are looking worse, but on the other hand, the economy is looking softer," said David Wyss, chief economist at Standard & Poor's in New York.

Wyss said he believed the Fed was using the statement to edge closer to cutting rates if necessary to bolster economic growth, but he said investors should not expect any change at the Fed's next meeting on May 9.

David Jones, chief economist at DMJ Advisors, a private consulting firm, said he believed the Fed would remain on hold probably until September.

"The Fed is facing a standoff. The economy is slowing and inflation is getting worse," Jones said. "They have got to let the dust settle on this very mixed picture before they do anything."

Wyss said the Fed could cut rates as many as three times although he said some of those reductions might not come until next year.

Jones said he believed the Fed might be content to just cut rates once in the second half of this year if the economy is showing signs of rebounding at that time.

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