Fed Rate Unchanged…For Now

Euler Hermes ACI Chief Economist, Daniel C. North, provides insight to the Fed’s decision to leave interest rates unchanged.

OWINGS MILLS, Md. – The U.S. Federal Reserve voted to leave interest rates unchanged this week, citing both a concern over inflation and a lack of economic growth. Euler Hermes ACI Chief Economist, Daniel C. North, released a statement providing insight to the Fed’s decision.
“The Fed's bias towards fighting inflation remained unchanged, saying that the ‘…predominant policy concern remains … inflation,’” North said. “The fact that several inflation indicators remain at "elevated” levels certainly contributes to this bias. Perhaps most importantly, the Personal Consumption Expenditures (PCE) core rate still remains above 2 percent, which is thought to be about the Fed's highest tolerable rate on its most carefully watched gauge.”
North also noted that inflation concerns may soon lessen, citing the drop of the PCE from 2.4 percent in February to 2.1 percent in March. Additionally, critical Union Labor Costs fell to a 1.3 percent year-over-year growth rate in the first quarter of 2007, as opposed to 3.4 percent in the fourth quarter of 2006.
“Since inflation in labor costs is more influential than in materials costs, this was welcome news indeed,” North said.
The Fed’s trust that a slowing economy would moderate inflation pressures seems to be working, according to North. First quarter GDP was the slowest in four years, at 1.3 percent and employment figures showed only 88,000 jobs created in April, the lowest numbers in over two years.
“The unprecedented demise of the housing market no doubt is helping curb the consumer,” North said. “The Treasury yield curve is still inverted and has been since last July, a historically strong indicator of a slowing economy. Given the weakness in the economy, the Fed may only have to wait until the fall to shift its bias towards growth and start cutting rates.”
Euler Hermes ACI a provider of trade credit insurance and accounts receivable management solutions.
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