Washington
25 June 2008
After steadily cutting interest rates for much of the past year, theU.S. central bank has decided to keep them unchanged, while signalingconcerns about inflation that could trigger interest rate hikes in thefuture. VOA's Michael Bowman reports from Washington, where FederalReserve policy makers concluded a two-day meeting Wednesday.
TheFederal Reserve typically raises interest rates during periods of briskeconomic activity that tend to boost inflationary pressures, andusually cuts interest rates when the economy falters and inflationaryrisks are low.
But the U.S. economy remains weak and Americanconsumer confidence continues to plunge, while inflationary pressures,led by rising energy costs, have been growing.
Furtherinterest rate cuts could heighten the risk of inflation, yet raisinginterest rates could send a weak economy into a full-blown recession.
Ifeach option poses undesirable risks, perhaps the best course of actionis to maintain the status quo. That appears to be the Fed's thinking,at least for now, as it chose to keep interest rates unchanged.
Ina statement, the central bank said recent interest rate cuts should setthe stage for a return to moderate economic growth, although it couldnot discount the possibility of a recession, saying that "downsiderisks" to growth remain. At the same time, the Fed said, in light ofprice increases for energy and other commodities, uncertainty about theinflation outlook remains high.
Given that uncertainty, manyeconomists say the Federal Reserve will continue to face toughdecisions in the months ahead.
"TheFed is facing probably one of the most difficult circumstances that ishas faced in three decades," said Julia Coronado, a senior economistwith the New York-based investment firm, Barclays Capital. "We are seeing somepretty pervasive inflationary pressures. They [Fed policy makers]learned in the '70s that you cannot successfully accommodate an energyprice shock with lower [interest] rates. That, ultimately, it does fanthe flames of inflation."
In the 1970s, the United States facedsimilar circumstances of slow growth amid rising prices - whateconomists refer to as "stagflation." The U.S. economy returned torobust growth with low inflation in the 1980s, but only after theFederal Reserve dramatically raised interest rates and America suffereda deep recession.
After steadily cutting interest rates for much of the past year, theU.S. central bank has decided to keep them unchanged, while signalingconcerns about inflation that could trigger interest rate hikes in thefuture. VOA's Michael Bowman reports from Washington, where FederalReserve policy makers concluded a two-day meeting Wednesday.
TheFederal Reserve typically raises interest rates during periods of briskeconomic activity that tend to boost inflationary pressures, andusually cuts interest rates when the economy falters and inflationaryrisks are low.
But the U.S. economy remains weak and Americanconsumer confidence continues to plunge, while inflationary pressures,led by rising energy costs, have been growing.
Furtherinterest rate cuts could heighten the risk of inflation, yet raisinginterest rates could send a weak economy into a full-blown recession.
Ifeach option poses undesireable risks, perhaps the best course of actionis to maintain the status quo. That appears to be the Fed's thinking,at least for now, as it chose to keep interest rates unchanged.
Ina statement, the central bank said recent interest rate cuts should setthe stage for a return to moderate economic growth, although it couldnot discount the possibility of a recession, saying that "downsiderisks" to growth remain. At the same time, the Fed said, in light ofprice increases for energy and other commodities, uncertainty about theinflation outlook remains high.
Given that uncertainty, manyeconomists say the Federal Reserve will continue to face toughdecisions in the months ahead.
"TheFed is facing probably one of the most difficult circumstances that ishas faced in three decades," said economist Julia Coronado. "We are seeing somepretty pervasive inflationary pressures. They [Fed policy makers]learned in the '70s that you cannot successfully accommodate an energyprice shock with lower [interest] rates. That, ultimately, it does fanthe flames of inflation."
In the 1970s, the United States facedsimilar circumstances of slow growth amid rising prices - whateconomists refer to as "stagflation." The U.S. economy returned torobust growth with low inflation in the 1980s, but only after theFederal Reserve dramatically raised interest rates and America suffereda deep recession.