Economic Commentary: The Federal Reserve’s Next Move

The Fed’s Dilemma…

Each time the Federal Reserve Board has met in the past few years, the questions have been the same. How do we overcome a huge recession and the economic hangover caused by this recession? The real estate market was a mess. Unemployment was soaring. Confidence was waning. The response by the Fed was comprehensive and massive–super low rates, purchase of mortgage and Treasury securities and providing liquidly to banks and other financial institutions. Even the end of the recession did not bring a pause in the Fed’s work. The tepid recovery was fragile and required more of the same. But now things are changing. Overall, this is very good news because the economy, while certainly not roaring ahead, is moving forward. Jobs are being created and even the real estate market is starting to stir.

However, a recovery brings new issues for the Fed to consider. Soaring oil prices and other commodities are portending of the threat of inflation. The massive debt of our government is spawning a massive debate with regard to what to cut and how quickly. The threat of a government shut-down last month and the coming debate on the debt ceiling is changing the focus of those in Washington. The Fed must play both sides of the fence. A strong economy is necessary not only to create the jobs we have lost but also to increase government revenues. However, the markets are expecting the Fed to be diligent to prevent a permanent outbreak in inflation. For the first time in a long while, the Fed will hear voices strongly considering raising rates from the lowest levels in history. The markets have already taken into account higher short-term rates and many are expecting the move sooner rather than later. Believe it or not, this move by the Fed actually may be necessary to keep long-term rates low in the long run — along with serious action to cut the deficit. While an economic recovery is great news, for the Fed it presents a new set of decisions to keep the ball rolling.

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