Wednesday, May 9, 2007

The FED and the Consumer

These excerpts came from an article in Bloomberg today that I think correctly summarizes the position of the Federal Reserve and the US consumer:

The Fed kept the benchmark interest rate at 5.25 percent for a seventh meeting today and said inflation remains the ``predominant'' risk for the economy.

If the inflation rate is running at 3% per year and nominal GDP growth is 3% then the growth rate in real GDP is 0%. I don't think the fear is inflation as much as anemic GDP growth.

``The consumer is stressed,'' said Gregory Miller, chief economist at SunTrust Banks Inc. in Atlanta. ``Energy prices don't look like they'll moderate, housing is still in a morass and the labor market has slowed conspicuously.'' Still, ``the Fed is going to stick to their guns and guard against inflation.''

This stress is due to slowing hourly wage growth, increasing unemployment, a difficult housing market, and increasing fuel prices. Additional weak growth in real PCE is expected through at least year end.

What I think is the most important comment in the article:
``I don't think the Fed has got a lot of room for maneuver,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts. ``At this point, growth hasn't deteriorated enough to allow the Fed to cut rates, while inflation is still above their comfort zone.''

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