Fed’s Interest Rate Campaign Winding Down

By May 11, 2006Economy

Business is UpFor a 16th consecutive time, the Federal Reserve’s Open Market Committee (FOMC) raised its benchmark federal funds rate 25 basis points to 5 percent, its highest level in half a decade. In its statement, the Fed left the door open for further rate increases if new signs of inflation show themselves. However, it seems clear that the FOMC feels it has reversed most of its accommodative policy and is now at more-or-less a neutral stance.

As the Fed noted, the recent rise in energy prices has yet to have a significant impact on the prices of other goods, but my bet is that this can’t go on much longer. If producer are convinced that the rise in energy prices is permanent, then more pass through to consumers is likely. However, there is some hopeful news on the energy front. A significant amount of refining and production capacity is still being repaired in the gulf coast, and when more its comes back on line, some moderation in energy prices is likely.

Like most private-sector forecasts, the Fed sees the economy moderating to a more sustainable pace as the year goes on, chiefly due to a slowdown in housing. Will this Goldilocks scenario play out? While the fundamentals are sound, the fact of the matter is that the volatile world energy market continues to be a real concern. And while nothing can be done to buffer ourselves in the short run, it should be clear to anyone who follows the economy that it is imperative that we begin to diversify our energy consumption and enhance our own energy productive capabilities. Like having an itch that you can’t scratch, our dependency on foreign sources of energy is getting really annoying, especially since we currently have domestic resources that are just waiting to be tapped.

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  • Steve Woodring says:

    How does raising interest rates in the U.S. help control inflation, which appears to be soley caused by the increasing price of one commodity, oil ?