In an unexpected decision, the Federal Reserve’s Federal Open Market Committee (FOMC) gambled today that the economy can muddle through the next month without a rate cut, despite recent shocks to the financial markets that are reverberating from Wall Street to Main Street.
“Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth,” said the FOMC in a statement announcing its decision to keep the federal funds rate at 2 percent. (The federal funds rate is the interest banks pay to borrow money from each other for short periods of time.)
The primary factor in today’s decision? Inflation. “Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities,” the FOMC statement read. “The committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain. The downside risks to growth and the upside risks to inflation are both of significant concern to the committee.”
Many economists had expected the Fed to respond to the ongoing financial turmoil with a rate cut of one-half percent, hoping it would provide much-needed liquidity to the markets. “On the fiscal side, the options [for stabilizing the financial markets and economy] are extremely limited, so it puts the onus back on the Fed to steer us through this short-term period of volatility,” said Brian Bethune, chief U.S. financial economist for Global Insight, during a morning teleconference discussing the crisis prior to the FOMC statement.
At the moment, though, the Fed appears to want to watch and wait until its next gathering on Oct. 28 and Oct. 29. Given the proximity of that meeting to the Nov. 4 presidential election, though, the Fed is highly unlikely to change rates; it doesn’t want to appear to have influenced election outcomes through its monetary policy decisions.
Alison Rice is senior editor, online, at BUILDER magazine.
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