John Berry on the Fed's Decisions This Week
He writes, for Bloomberg:
The Federal Open Market Committee will keep its overnight lending rate target at 5.25 percent and say its ``predominant policy concern'' is that inflation may not moderate as expected. Neither the recent drop in stock prices nor the rise in yields on riskier debt has gone far enough to cause Fed officials to alter their forecast for continued moderate growth in this year's second half.... Because of the sudden return of market volatility, some analysts again are predicting the Fed will cut rates before the year is out. Of course that could happen if the economy turned really sour, though there are few signs of that....
As Fed Chairman Ben S. Bernanke told Congress on July 18,
Declines in residential construction will likely continue to weigh on economic growth over coming quarters, although the magnitude of the drag on growth should diminish over time.'' The latest figures indicate that is already happening. Thecentral tendency'' of Fed officials' latest forecasts is for GDP to expand 2.25 percent to 2.5 percent this year. Given the 2 percent growth rate of the first half, it would take 2.5 percent to 3 percent growth for the rest of the year to realize those forecasts....Meanwhile, there was also some good news about inflation in the GDP figures. The inflation measure most closely watched by the Fed, the personal consumption expenditure price index, rose at just a 1.4 percent annual rate in the second quarter and was up 2 percent from the second quarter of last year. Certainly a 1.4 percent inflation rate would satisfy just about everyone at the Fed -- if it were to continue....
[Data] evisions suggest that productivity -- output per hour worked -- also grew less rapidly. That may indicate that the economy's potential to grow without overheating probably isn't as great as has been thought. In 2005, for example, GDP growth of a bit more than 3 percent was fast enough to cause the U.S. jobless rate to fall slowly. Since last fall, just a 2 percent growth rate has been enough to keep unemployment at a low 4.5 percent level. So long as unemployment is in that range, Fed officials aren't going to cut rates.
