Home / World Business
Thu, Aug 30, 2007 - Page 10 News List

Federal Reserve underestimated US credit crisis

CREDIBILITY GAP Investor anxiety over inflation could keep the Fed from making substantial reductions in the benchmark rate or announcing a series of cuts

BLOOMBERG

Policymakers still weren't convinced that inflation had receded enough to relax their guard at the start of the month, the minutes showed. Part of the moderation in the four months through June was due to "volatile" categories such as clothing, the Fed said. Inflation expectations over the next year also "remained unchanged" even though gasoline prices had fallen.

"Participants remained concerned about factors that could augment inflation pressures," including a slower trend growth rate in productivity, the Fed said.

It also cited high levels of "resource utilization," a reference to unemployment that remains historically low, economists said.

Productivity, or the amount that workers produce per hour, rose about 1 percent last year, the smallest gain since 1995, US Labor Department figures show. Fed staff economists took account of slower productivity in cutting their predictions for economic growth this year and next year, the minutes said.

"If you have slower productivity growth, tight markets translate into more inflation, that is why there is this extreme focus on inflation," said Robert Eisenbeis, former head of research at the Federal Reserve Bank of Atlanta. A rate cut is "not a foregone conclusion" at next month's meeting, he said.

This story has been viewed 1921 times.
TOP top