January 28, 2004

TheStreet.com: Fed softens commitment to holding interest rates low

The Fed held rates steady but stocks tumbled when the fed softened its commitment to holding them low.
Economists had widely expected the Fed to keep interest rates unchanged at 1% but pundits had not anticipated a change in the policy statement. "We think this is simply a rewording, rather than a change in Fed's accommodation policy as it conveyed that it 'can be patient in removing its policy accommodation,'" said Ashraf Laidi, chief currency analyst at MG Financial Group.
Presumably low rates increase the risk of inflation since low interest rates increase the money supply. Apparently the risk of deflation is still present in the Fed models and the risk of run away inflation looks relatively small. As long as this is the case, the Fed can leave interest rates low to encourage investment over savings. Posted by dapkus at January 28, 2004 04:03 PM | TrackBack