Energy Matters

The FOMC has decided to keep the federal-funds rate at 2% despite the largest one-month jump (0.08%) in inflation since 1981. Rates are usually pushed up to beat inflation down, but the Federal Reserve has disconnected the U.S. economy from normal functioning, while propping up the U.S. mortgage industry, so now the FOMC must respond similarly—dysfunctionally.

Pushing up interest rates now would tip the already-teetering U.S. mortgage profile toward more foreclosures. Meanwhile, the U.S. dollar remains weak, and the federal budget deficit is a half-trillion dollars.

Following is the FOMC’s statement today. Committee member Richard W. Fisher again dissented, preferring to raise the rate, as he has held to through this year.

“The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent. Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress.

“Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth. Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated.

“The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain. Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee.

“The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

“Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.”

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, OilandGasInvestor.com; ndarbonne@hartenergy.com  

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