Forex Blog: Currency Trading News & Analysis.

June 26th 2008

Fed Holds Rates

At its most recent meeting, the Fed voted to hold rates steady at 2%. Only one week ago, 90% of investors (based on interest rate futures) had expected the Fed to lower rates.  What changed? In the words of one columnist, Randall Forsyth, the Fed opted to take a "fork in the road," upon reaching the conclusion that price stability is now just as important as economic growth. Forsyth would be pleased with the Fed’s decision, having argued that the institution is largely responsible for the inflation that it is currently trying to rein in. The record low interest rates following the burst of the dot-com bubble, not helped by the recent loosening of monetary policy, have created a surplus of liquidity. The Fed was abetted by the Central Banks of emerging markets, who by linking their respective currencies to the Dollar have stoked the fires of domestic inflation. In trying to reverse the "liquidity pump" the Fed may likewise be aided by these same Central Banks. Tumbling prices for "economically sensitive" commodities serve as evidence of their respective efforts to clamp down on inflation. Barron’s reports:

"As the liquidity fueled food and energy price bubbles burst, who will believe when headline inflation collapses? It really could happen. Poof!"

Read More: Will The FOMC Take The Fork In The Road?

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Posted by Adam Kritzer | in Central Banks, US Dollar | No Comments »

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