The US central bank, the Federal Reserve, Tuesday held short-term interest rates steady, breaking a pattern of 17 consecutive quarter point hike in rates going back over two years. The Fed is worried that more rate increases could push a slowing economy into recession.
This change in monetary policy was anticipated by financial markets, which have been preoccupied with signs of slowing economic growth. The Federal Reserve statement agreed with that assessment saying a cooling housing market and higher energy costs have slowed the pace of economic activity. Bob McTeer, a former governor of the Dallas, Texas Federal Reserve Bank, says the long period of monetary tightening is over. He says the central bank has concluded that higher rates will not undo the inflationary effects of the doubling of oil prices over the past two years.
"You don't really fight that with a tighter monetary policy," he said. "The Fed is reconciled to having a bulge in inflationary right now [from higher oil]. It's already baked into the cake. But you can't get energy prices to go down by tightening monetary policy. And do so would just tank the economy."
Ken Volpert, a bond market analyst at Vanguard Securities in Philadelphia, disagrees and says the Fed may still raise interest rates at its policy-making meetings in September, October or December. Volpert says the Fed will be guided by data assessing the pace of economic activity.
"Other central banks are continuing to raise interest rates, which can hurt our bond markets as well as less capital comes into our markets," he added. "And then this whole issue about how does commodity price inflation and energy prices flow through into our core inflation. And that is yet to be seen."
The US inflation rate is about three percent and short-term interest rates 5.25 percent. US economic growth has slowed to the 2.5 percent range, a sharp decline from the over five percent pace of earlier this year. Oil prices on Monday nearly matched their record high of $78 a barrel due to a damage to pipeline in Alaska, the site of America's largest US oil-producing region.
Prices fell back to the $75 range Tuesday as a government agency said it would consider releasing oil from storage to compensate for any supply disruption.