Credit & Debt: What The Fed Fears

I meant to get to this a few days ago....The Federal Reserve may be telegraphing its intentions for its next meeting via well-placed news articles describing its concerns about the housing slump:

The Fed held interest rates steady at the December session. But it also left the door open to a possible rate increase, if needed, to thwart inflation. However, one Fed member -- who was not identified in the minutes of the meeting -- thought the central bank should have held out the possibility of a rate cut as well.

I wonder who this might be...certainly not Jeffrey Lacker, who has continually campaigned for higher rates, even in the face of sluggish job creation. Now that wages are on the rise, however, perhaps the governors are getting bolder about what they feel is worth risking.

I think the Fed will continue to beat the inflation drum for the first few months of 2007, while they wait for the effects of the previous six months' economic trends to manifest themselves. Once all the losses from those unpaid ARMs and foreclosures start to hit, they might go for a rate cut to spur investment and new mortgage loans. Of course, that'll put us right back where we started, except that America's record level of consumer debt means that we're already too maxed out to seriously go for the gold.

So what will happen? No one knows, but as long as the Fed's all-important "inflation-fighting credibility" is maintained, we should be fine.

Right?

Posted at January 5, 2007 11:55 AM

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I meant to get to this a few days ago....The Federal Reserve may be telegraphing its intentions for its next meeting via well-placed news articles describing its concerns about the housing slump: The Fed held interest rates steady at the December session. But it also left the door open to a possible rate increase, if needed, to thwart inflation. However, one Fed member -- who was not identified in the minutes of the meeting -- thought the central bank should have held out the possibility of a rate cut as well. I wonder who this might be...certainly not Jeffrey Lacker, who has continually campaigned for higher rates, even in the face of sluggish job creation. Now that wages are on the rise, however, perhaps the governors are getting bolder about what they feel is worth risking. I think the Fed will continue to beat the inflation drum for the first few months of 2007, while they wait for the effects of the previous six months' economic trends to manifest themselves. Once all the losses from those unpaid ARMs and foreclosures start to hit, they might go for a rate cut to spur investment and new mortgage loans. Of course, that'll put us right back where we started, except that America's record level of consumer debt means that we're already too maxed out to seriously go for the gold. So what will happen? No one knows, but as long as the Fed's all-important "inflation-fighting credibility" is maintained, we should be fine. Right?