Fed may enter a period of unchanged rates

The Federal Reserve, after an unbroken two-year stretch of raising interest rates, may now be entering a prolonged period where the central bank keeps rates unchanged.
It could be next June or later before the Fed makes any change in interest rates because of the opposing forces buffeting the economy at present.

Analysts hold that view because they think inflation is likely to linger at levels that will keep the Fed from cutting rates and economic growth will be too slow to think about raising rates.

The central bank, in announcing Wednesday that it was keeping the federal funds rate unchanged for a third straight meeting at 5.25%, cited the twin dangers it is confronting.

The Fed statement said core inflation, which excludes energy and food, remained at "elevated" levels even as overall economic growth has been slowing, reflecting in part the slowdown in housing.

Wall Street had widely expected the Fed to stand pat on interest rates, a decision that affects millions of borrowers whose credit card, home equity lines and other loans are tied to the prime rate set by banks and other private lenders in response to Fed policy. The prime will remain at 8.25%, where it has been since June, the last time the Fed raised rates.
Analysts saw the Fed's brief statement Wednesday as confirmation of their belief that the central bank is through raising rates but at the same time is in no hurry to start cutting rates.

The Fed is telling us that there will be no change in monetary policy for the foreseeable future, but on the other hand, the Fed knows if you were to raise rates now you could turn what is a reasonably orderly decline in housing into a rout and threaten pushing the economy over into a recession.

My believe is that by the middle of next year, the sub-par growth should have helped to lower core inflation enough that the Fed will feel comfortable in beginning to cut rates, setting the stage for stronger growth in 2008.

Economists believe that while the Fed keeps short-term rates unchanged, long-term rates will probably move higher as financial markets realize their expectations for quicker Fed rate cuts will not be realized.

Of course, if a sudden spike in energy prices rekindles inflation, the Fed might feel the need to boost rates further. Or if the weakness in housing threatens an economy-wide recession, the Fed might ride to the rescue with faster rate cuts.