August 4, 2008

Fed Unlikely to Change Rates This Week

By Barbara Hagenbaugh

WASHINGTON -- Federal Reserve policymakers are finding their jobs aren't getting any easier as a sluggish economy and stubbornly high inflation put them in an interest-rate bind.

Given the competing challenges, Fed Chairman Ben Bernanke and his colleagues are expected to keep their target for short-term interest rates, which influence borrowing costs economywide, at 2% when they meet Tuesday. The rate has been steady since April.

The meeting comes a year after U.S. central bankers began aggressively pumping money into a faltering financial system. In some ways, the job now has become more complicated.

While they continue to fight to stabilize financial markets and an economy weakened by the housing meltdown, Fed policymakers now also have to ward off inflationary pressures that have nearly doubled in the last year in large part because of rapidly rising energy and food prices. The consumer price index was up 5% in June from a year earlier, the highest in 17 years.

While the weak economy would suggest the need for lower interest rates, price pressures are forcing the Fed to sit on the sidelines. The Fed would normally raise rates to combat inflation.

Fed officials "are very uncomfortable," says Kim Rupert, managing director at Action Economics.

With no change in interest rates, extra attention will be paid to the post-meeting statement for signs of when the Fed may next change the target rate and in what direction. However, Rupert and others say Fed officials themselves likely are not clear what they will do. "The important thing (for the Fed) right now is to skate through this delicate period," says Brian Bethune, U.S. economist at Global Insight.

More bad economic news came Friday when the Labor Department said the unemployment rate jumped to 5.7% in July, the highest since March 2004, as U.S. employers cut jobs for the seventh consecutive month. A day earlier, the government said the economy grew at just a 1.9% annual rate during the quarter ended June 30.

The Fed will likely start to slowly raise interest rates in the beginning of 2009, according to the median response from a recent USA TODAY survey of 54 economists. By next year, the economy should be "weak, but not getting weaker," allowing the Fed to better address price pressures, says Conrad DeQuadros of RDQ Economics. (c) Copyright 2008 USA TODAY, a division of Gannett Co. Inc. <>