Bernanke Fed

By Reuters -  |  Posted 2008-06-30 Email Print this article Print

Insiders deny politics influences their decisions. But there is no doubt moving rates in an election year can make the Fed either hero or goat from a political perspective.


The current Fed under Chairman Ben Bernanke slashed benchmark overnight rates to 2 percent in seven steps that began in September.

But it is now increasingly worried about inflation in the face of surging food and energy prices, and last week it halted the rate-cut campaign and hardened its warnings on prices.

Investors think this means the next move in rates will be up, and see almost an 80 percent likelihood of a quarter-point rise by the Fed's meeting at the end of September.

Some economists, concerned the economy is still fragile, think it will take longer for growth to recover and argue against hasty rate action.

In particular, they worry that more than $100 billion of economic stimulus checks the government is sending households will deliver only a temporary fillip to consumer spending.

Once that money runs out, the economy could stumble, and they think the Fed will want to watch spending behavior over the summer and early fall before raising rates.

Data on Friday showed that stimulus checks had pushed consumer spending up by a sharper-than-expected 0.8 percent last month and pushed up disposable personal income by the largest amount since 1975.

Economists at JPMorgan saw this doubling second-quarter U.S. growth to a 2 percent annual pace, but they warned it would fall back to 1 percent in the third quarter.

As the Fed weighs inflation and growth risks, it has only three more scheduled meetings before the presidential election -- August 5, September 16 and October 28-29.

If Bernanke trusts his forecast that inflation will moderate as the rapid gains in energy prices subside, and wants to give the economy a chance, he could hold off tightening monetary policy until the post-election meeting on December 16.

"They're not going to do anything in October, a week before the election, so I think they are on hold," said John Silvia, chief economist at Wachovia, the fourth-largest U.S. bank.

(Additional reporting by Emily Kaiser in Washington, editing by Maureen Bavdek)


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