All markets will be on watch Tuesday as Federal Reserve officials meet to signal or issue an outright direction as to interest rates and whether to modify the “extended period” posture for historically low rates that has been the monetary mantra for months.
The policy-setting group of Fed officials is scheduled to meet six more times this year after Tuesday.
Since the last meeting of the Federal Open Market Committee in January, this much is certain: at least two members have either opposed or questioned the wisdom of keeping the key federal funds rate at its 0-.25 percent level for the “extended” timeframe, possibly putting pressure on inflationary factors and fueling potentially harmful financial markets speculation.
Recently, St. Louis Federal Reserve Bank President James Bullard went on the record suggesting that the “extended period” position should at least be examined. “You don’t want to be locked in to a particular time frame,” Bullard has told reporters.
Bullard is one of 10 on the FOMC with the power to raise lending rates.
However, Bullard has stopped short of echoing the mindset of Kansas City Fed Bank President Thomas Hoenig, who was the lone dissenting vote in the Jan. 26 FOMC meeting to keep the funds rate at its current level.
The target funds rate – the overnight interbank borrowing rate – has been unchanged since December 2008.
Most economists foresee at least the beginning of a shift upward in short-term interest rates, possibly by the end of the year. Such a move could pose harm to the already strained household budgets of American consumers. It would mean subsequent higher rates on credit cards, big-ticket purchases bought on credit, home equity lines and primary mortgages. Banks use the funds rate as a benchmark for setting prime lending rate for their best customers.
No Fed official has said a change is imminent in the current policy. Quite the opposite, several Fed officials have been heard in speeches of recent weeks asserting that no change in course is justifiable – at least not for now. The dominant outlook is that the economic recovery has not gained a significant foothold across a sufficient number of sectors to justify a hike in interest rates.
Although there have been positive signs as recent as last week, including an expected boost in retails sales, other indicators point to protracted weakness, such as the housing market and a persistent foreclosure crisis.
And there is too much that remains unclear as to the direction of the unemployment rate, which remains too-high in many states that are vital to a widespread and sustainable recovery.
