U.S. Economy Still Shaky

By Reuters -  |  Posted 2008-08-05 Print this article Print

The 10-1 decision by the U.S. Federal Reserve leaves the benchmark federal funds rate target at a low 2 percent, where it has been since April.


The Fed's decision comes as evidence points to lingering economic weakness from the housing slump, shaky consumer sentiment and tight credit.

At the same time, a marked pullback in oil prices, which have slid to around $120 a barrel since cresting above $147 a barrel in July, has eased some of the central bank's worries about inflation.

The drop in oil prices had led investors to anticipate the Fed would not need to raise rates soon to combat inflation at the expense of choking off already weak growth, and was a factor pushing equities prices up ahead of the central bank's decision.

The economy grew at respectable if somewhat subdued 1.9 percent annual rate in the April-June quarter, but that growth followed a 0.2 percent contraction in the fourth quarter of last year and a tepid 0.9 percent gain at the start of 2008.

Many economists expect the economy to weaken anew in the second half of the year as the boost to consumer spending from government stimulus checks recedes.

With the jobless rate at a four-year high and employers cutting jobs for a seventh straight month in July, many observers suggest it is a technicality to insist the economy is not in recession simply because a popular definition -- two consecutive quarters of contraction -- has not been met.

At the heart of U.S. economic malaise is a housing market that has not shown convincing signs of stabilizing. The pace of existing home sales fell to the lowest level since 1998 in June and mortgage applications are at their lowest level since 2000 as buyers remain on the sidelines.

A mild silver lining is the recent drop in oil prices.

Fed officials have worried that big increases in energy and food prices could set in train an inflationary psychology in which workers and businesses push harder to cover their costs, leading to a broader pickup in prices.

A report on Monday showed inflation jumped 0.8 percent in June, the steepest rise since 1981. The gain over the past year climbed to 4.1 percent, the most since 1991.

While so-called core inflation, which excludes volatile food and energy prices and is viewed by the Fed as a good barometer of the future course of prices, has been better behaved, it also moved up in June.

Core prices have risen 2.3 percent over the past year, a bit above the 1.5 percent to 2 percent range that many Fed officials believe is ideal.

(Additional reporting by David Lawder; Editing by Tim Ahmann)


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