Crew Capital Management Thoughts on Investment

Welcome to the Crew Capital Management Thoughts on Investment blog. At Crew Capital, investment education is key to how we work with our clients. We hope our conversation and analysis entice you to think further on your investment strategies and planning. For further discussion, please contact us at rjung@crewcapital.com

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Robert F. Jung, CFA CPA*

*CPA inactve

Wednesday, May 28, 2008

Federal Reserve intent on not letting inflation spiral out of control

The Federal Reserve is intent on not letting inflation spiral out of control, even as the economy teeters on the brink of recession, according to a top Fed policy-maker. Data shows more economic weakness almost certainly lies ahead, but that would not automatically point to a need for more rate cuts -- indeed, rate increases could be some ways off, said Janet Yellen, president of the San Francisco Federal Reserve Bank. This suggests the Federal Open Market Committee (FOMC) has reached an inflection point in its interest rate policy, and could start an extended pause in rate moves at its next meeting June 24-25 . "At a time when commodity prices are rising as rapidly as they are, inflation is a concern," she said. Those price hikes, especially for energy and food, are taking "a huge toll on households." The residential housing market is likely to remain weak, she said, and might not hit rock-bottom until next year.

The U.S. central bank has slashed its benchmark interest rate to 2 percent currently from 5.25 percent since mid-September. This is in response to the housing and credit market crunch that has pushed economic growth down to minimal levels. The rate cuts, along with the federal tax rebate stimulus program, "should be sufficient to promote a step up to moderate economic growth later this year," Yellen said. She said the tax rebate checks should make a notable difference in the second and third quarters of this year.

Opposition to rate cuts within the FOMC has become increasingly pointed in recent months. Minutes from the Fed's April 30 policy meeting show that the directors of seven of the 12 regional Federal Reserve banks wanted to hold the discount rate -- that charged on direct Fed loans to banks -- steady at 2.5 percent. In the end, the Fed's board approved a quarter-point cut in the rate to 2.25 percent, matching a quarter-point cut in the fed funds rate. Financial markets suggest the FOMC will keep benchmark rates steady for now, before possibly starting to raise rates in the fourth quarter. Prospects for a quarter-percentage point rate increase in October are running at about 50 percent.

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