The Federal Reserve has increased the central bank’s short-term interest rate target to 5.25% from 5%, but indicated it may pause rate hikes if inflation is sufficiently contained. The most recent economic reports indicate some acceleration in consumer spending and housing.
Generally, high interest rates cool economic growth because they crimp consumer and business access to cheap borrowing. But since the Fed does not want to halt economic growth altogether, it finds itself facing a somewhat precarious balancing act.
This is evident in the language of the statement released yesterday. “The extent and timing of any additional firming …will depend on the evolution of the outlook for both inflation and economic growth.”
The Fed noted that “core inflation has been elevated in recent months” and “high levels of resource utilization and the prices of energy…have the potential to sustain inflation pressures.” The Fed hopes that the slowing economy will continue to put a lid on inflation.
A report released by the U.S. Dept of Commerce today indicates that there doesn’t appear to be much of a slowdown on the consumer spending side of the economic equation—which accounts for about 70% of the total U.S. economy. Commerce announced that disposable personal income (DPI), a measure of total wages and income less taxes, increased 0.3% ($31.6 billion) in May. The acceleration of consumer spending has outpaced that of DPI for four of the last five months, and was up 0.4% in May.
Earlier in the week, the U.S. Census Bureau announced that new home sales in May jumped 4.6% from April. That increase was contrary to the expectations of many economists. Compared to May 2005, however, sales dropped 5.9%.
To view the Federal Reserve statement, go to www.federalreserve.gov/boarddocs/press/monetary/2006/20060629/default.htm
To view the personal income report, go to www.bea.gov/bea/newsrelarchive/2006/pi0506.pdf
To view the new home sales report, go to www.census.gov/const/newressales.pdf
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