In concluding its Federal Open Market Committee Meeting, the Federal Reserve Board released a statement suggesting that it will leave its target federal funds rate at essentially zero percent, where it has been since October 2008. The Fed noted that “the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had anticipated” at its April meeting. It feels that much of the recent softness in the economy is due to temporary factors, such as higher food and energy prices and supply chain disruptions stemming from Japan. Housing and employment will challenges, however.
As reported last week, manufacturers have seen dramatic increases in raw material prices, with the producer price index reflecting a 0.9 percent increase for manufacturing costs last month and an 8.9 percent rise over the past year. Indeed, it is one of the top concerns of manufacturers right now, according to our recent NAM/IndustryWeek survey. Moreover, core consumer inflation is beginning to creep up over the past few months.
The Federal Reserve acknowledged this saying, “Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods… However, longer-term inflation expectations have remained stable.” The latter statement reflects Chairman Bernanke’s view that unique supply and demand phenomena are driving up these costs temporarily, much as he stated in his speech in Atlanta earlier this month. When these pressures subside, energy and commodity prices will dissipate.
With that said, I would expect – as do many other economists – that the Federal Reserve will begin increasing interest rates later this year. The FOMC statement notes that the Fed will complete its purchases of $600 billion in long-term Treasury securities by June 30, thereby ending its sometimes controversial second round of quantitative easing (“QE2”). The release notes that the Fed will “pay close attention to the evolution of inflation and inflation expectations.” Yet, with the economy expected to improve somewhat in the second half of 2011, the Fed will be free to put a lid on inflation if it senses that core inflation is becoming a problem.
Chad Moutray is chief economist, National Association of Manufacturers.