Federal Reserve officials, stuck between their conflicting goals of maximum employment and stable prices, chose yesterday not to favour either one. It was a wise choice.
Cutting the Federal Open Market Committee’s 2 per cent overnight lending rate target might have stimulated weak economic growth, at the risk of making inflation worse. Increasing the target in an effort to bring down inflation might have made the credit conditions plaguing the economy even tighter, undermining what growth there is.
So the FOMC did neither, deciding instead to leave the target unchanged for the second meeting in a row while waiting to see how economic events unfold. Actually, recent economic news hasn’t been as bad as some gloomy analysts portray. The economy continues to grow, the number of payroll jobs is falling relatively slowly, and it just may be that the break in commodity prices that Fed officials have long expected is at hand.
Crude-oil prices have dropped almost 20 per cent over the past month, to $118.60 a barrel from a peak of $147.27.
Corn prices have plummeted more than 30 per cent, to $5.45 a bushel, over the same period.
Higher food and energy prices have been major contributors to the 5 per cent increase in consumer prices over the past year. If the run-up slows - or in the case of gasoline, reverses - that would not only ease inflation pressures, it would ease some of the squeeze on consumers’ pocketbooks and encourage more spending on other goods and services.
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Even in the face of soaring consumer costs, the gross domestic product increased at a 1.9 per cent annual rate in the second quarter, with consumer spending bolstered by the tax-rebate checks many households received.
Meanwhile, there are growing signs of stabilisation in the hard-hit housing sector. New-home sales were higher this spring than originally reported, and sales of existing homes fell only 1 per cent from December to June. And the backlog of unsold new homes dropped sharply in June.