The US Federal Reserve, caught between mounting job losses and rising inflation, is likely to sit tight and hope that the interest rate cuts it has already provided will be enough to heal a sick economy.
Private economists believe that when the central bank concludes its one-day meeting scheduled for yesterday, it will announce that its target for the federal funds rate, the interest that banks charge each other, will remain at 2 percent.
Fed Chairman Ben Bernanke and his colleagues are being forced to navigate treacherous waters, trying to keep the economy from plunging into a deep recession while worrying about keeping interest rates so low that they could trigger a dangerous inflation spiral.
“The Fed is really locked in right now. They can’t go forward or backward,” said Sung Won Sohn, an economics professor at the Smith School of Business at California State University Channel Islands.
Many economists believe the funds rate will remain at 2 percent not only this month but for the rest of this year. That would mean that commercial banks’ prime lending rate, the benchmark for millions of loans, will remain at 5 percent, its lowest level since late 2004.
Responding to a severe credit crisis, the Fed launched an aggressive effort last September to cut interest rates. It reduced the funds rate seven times, lowering it from 5.25 percent, where it had been for more than a year, down to 2 percent in April.
At the Fed’s last meeting in June, officials passed up the chance to cut rates. Instead, they signaled growing concerns about inflation pressures that have been worsened this year by surging oil prices.
The combination of a weak economy and rising inflation has raised fears of stagflation, the malady that last beset the country during the oil price shocks of the 1970s. The Fed’s problem is that its main policy tool, interest rates, can only address one problem at a time.
Some Fed officials have said that even with unemployment rising and financial markets still turbulent, the Fed may need to move to combat inflation. Rising price pressures are difficult to contain once they gain momentum in the economy.
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