The Federal Open Market Committee (FOMC) decided today, by a vote of nine to one, to leave the fed funds target unchanged at 2.00%. The one dissenter was Richard Fisher, President of the Federal Reserve Bank of Dallas, who wanted to increase the target rate, making it more expensive to borrow. Mr Fisher’s dissent, in the face not only of the other FOMC members but of the unanimous expectation of the financial markets and economists, underlines the Fed’s dilemma. The economy is in very bad shape. According to the statement accompanying the rate decision, it’s getting harder to find a job or get a loan, and the housing sector remains mired in a “contraction.” The economy continues to grow, “partly reflecting some firming in household spending, but I would argue that there are only two reasons spending has not collapsed. First, people have to buy food and gasoline, and second, the Government just distribution billions of free dollars in the form of tax rebate checks.
The statement contains some interesting twists and turns. Economic growth is likely to be subdued for some time to come because of “the rise in energy prices,” and “the committee expects inflation to moderate later this year and next year.” But “the continued increases in the prices of energy and some other commodities” have caused the “upside risks to inflation and inflation expectations to increase.” Another downside risk to growth is “tight credit conditions,” but “the substantial easing of monetary policy to date”—that it, making credit easier to obtain—“should help to promote moderate growth over time.”
So, which is it? Are high fuel costs stifling the economy or producing inflation? Is credit tight or is credit loose? Unfortunately, the answers are “Yes, yes, yes and yes.” The Fed can’t go forward and they can’t go back. The FOMC kept the fed funds target at 2.00% because that’s what the market expected and any other decision would simply have caused disruptions to no purpose. The accompanying statement was a classic example of “on the one hand, and on the other hand,” without really tipping your hand at all.