Monday, Aug. 4
Posted 4 p.m. Eastern

Fed meets Tuesday

The Federal Open Market Committee meets this week, but don't expect any changes to interest rates. With the economy ailing, financial markets still impaired and continued inflation pressures, the Fed is looking at a landscape much the same as what they saw at the June meeting. All this means is that the Fed has little latitude -- either up or down -- on the interest-rate front. Even the post-meeting statement should remain largely unchanged as the Fed doesn't want to paint themselves into a corner.

What we can expect is more tough talk and dissent on inflation. Look for the inflation hawks, Richard Fisher and Charles Plosser, to vote for an interest rate increase. The rhetoric and dissenting voices are about all the Fed has to combat inflation, so expect them to use it.

The recent decline in oil prices is a welcome move, but it is far too little and far too early to be projecting any easing of inflationary pressures or boost to economic growth. Should we see a sustained move to lower oil prices, the Fed's long-held belief that inflation will "moderate" on its own could be proven correct. But only time will tell.

Also, the credit crunch is now one year old and we are no closer to calling an end. What has to happen for the credit crunch to disappear? The best answer is nothing -- as in, if nothing further happens. No more Bear Stearns. No crises of confidence with regard to Fannie Mae, Freddie Mac or large hedge fund blowups. No seizing up of credit. No large bank failures. And no events that none of us can imagine (the "unknown unknowns" as Donald Rumsfeld would say). But the merry-go-round of the past 12 months has brought another crisis just as the credit markets appeared to be on the road to recovery, so suddenly expecting placid waters is a bit far-fetched.

Even with the economy hurting but not falling off a cliff, the Fed seems handcuffed by a lingering credit crunch and the ailing American homeowner, unable to back up their tough talk on inflation with any interest rate moves for months to come.

Thursday, July 24
Posted 2 p.m. Eastern

Readers sound off on oil, credit

Fulfilling an earlier promise, here are some of your responses to my post earlier this month on oil prices. My thanks to those who took the time. I've interjected a comment or two along the way.

--"I wanted to say I agree with you on the drive-through bit and people sitting there using up fuel ... I have been pondering this and several other points of "slack" in our driving habits, that need to be quantified and probably changed. Someone call the CEOs of every fast food place and bank out there and close the bloody drive-through -- it's costing us ..."

--"Since the oil crises first raised its ugly head in the '70s, we did nothing to prevent it from happening again. We had nearly 40 years to work on the problem and we did nothing. We continued along the slippery path that eventually led us to this day when our whole economy is based upon oil in one way or another. Of course big businesses that had ownership or ties to the oil conglomerates did not want to become oil independent. It would be counterproductive to their goals and to their bottom lines. Even the government did nothing to move our country away from our oil dependency, and now here we are again, but this time it is much worse. Our economy is at an all-time low with possibly the exception of the Great Depression. We need to act now as a country with great fever and focus, and free ourselves from our oil dependency.

"Our enemies are currently controlling the world market in oil. Our big oil businesses and their shareholders appear to have their eyes focused on the bottom line and they seem to be oblivious to the perils that our country now endures. When will we wake up and demand freedom from our oil dependence? When will we as a nation work together with a commitment as though it was a life or death situation to free ourselves from our oil dependency? When it comes to our economy, it may be a do-or-die situation. I just hope that we don't do too little and too late. The American way of life is on the line. I just hope it isn't the bottom line!"

--"Regarding lowering gasoline prices, will the government ever enact policy to increase taxes on those driving SUVs? Or other policies that restrict SUV driving? This revenue can be fed into alternative energy or reimbursed into the travel economy through different channels. Why do we sit back and allow ignorant Americans to waste our precious resources and drive us into a depression?"

--"I read something online a few years ago when energy prices doubled from about $30 to $60, that inflation report totals put out yearly don't include figures for the energy sector. If they were, we might have a much better economy right now by being able to make more choices available for living and working arrangements with regards to public transportation."

I believe you are referring to core inflation readings, which exclude the prices of food and energy. Although such measures are fodder for wisecracks ("Who among us doesn't eat, drive, or heat our homes? Ha Ha Ha."), it can be a useful supplement to the headline inflation numbers that do include those items. Core readings are designed to tell us what we don't know. If oil prices jump or fall, what is the true price trend on other goods and services? Core readings tell us, and that information would otherwise be masked by a big increase or decrease in energy prices. But the point is that we must look at both headline and core inflation, not just one or the other. And I totally agree with you on the point about public transportation.

--"This comment goes against all the current conventional thinking about the Fed and interest rates. Lowering the interest rates to 2 percent hasn't made a dent anywhere. Why? Because lenders are not making loans ... reeling from too much bad debt on their books at present. Businesses are contracting and dropping like flies. What benefit does a low rate to borrow make if these reeling businesses don't think they can pay back the principal? To make a long explanation short, the trouble is ... the world's borrowers are already maxed out, and the world's lenders are skittish as a result. The rate could go down to 1 percent, in my opinion, and it wouldn't help. Will raising the interest rate dampen inflation? Outside of oil and commodity prices, inflation has been pretty tame. People still have to eat and drive, and until we have enough of some combination of high-mileage vehicles for sale, and enough people with money to buy them ... in order to drive the demand for oil down ... or increased drilling ... or regulation of the oil traders ... and/or all three, raising rates won't dampen inflation. Same goes for food commodities. In other words, in the short run, people still have to eat and drive, regardless of how the Fed tries to control all of this through interest rate adjustments.

"The world obviously does not run on money. It runs on credit. Now that it's dried up, the economy has dried up with it.

"In order to avoid a complete world financial meltdown, and the most dangerous thing, prolonged deflation, in my opinion, the Fed needs to continue to take whatever steps are needed to ensure some reasonable semblance of credit remains available in the market. It may mean more inflation for awhile, and it may mean more tax dollars going towards some unpopular bailouts (both of which, by the way, simply means the printing of more money). But it would be better to ease back to an unleveraged world rather than submit the world to that shock all at once. A spoonful of sugar makes the medicine go down."

Good points. That's why the Fed may talk tough about inflation, but realistically, any interest rate hikes are likely to be months away.

Fed Outlook archive