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STEADY GUIDANCE Ben Bernanke made clear last month that he is in no rush to boost rates and reel in the amount of money the Fed has put into the economy. |
Interest rate debate brews ahead of Fed meeting
Most expect board to stay at current level
WASHINGTON - Even with the Federal Reserve widely expected to leave interest rates at a record low this week to nurture the fragile recovery, fissures are growing among policy makers about when to start boosting rates to head off inflation.
A shift to higher borrowing costs is probably months away, but Federal Reserve chairman Ben Bernanke and his colleagues could privately debate how best to signal a change in stance to investors, businesses, and ordinary Americans when they open a two-day meeting today.
At its last meeting in late September, the Fed opted to stretch out into early next year a key program aimed at forcing down mortgage rates. It isn’t expected to veer from that course this week.
Fed policy makers are gathering as the economy emerges from the worst recession since the 1930s to a much-awaited recovery.
After a record four straight losing quarters, the economy started growing again last quarter, although most of the fuel came from government-supported spending on homes and cars.
Despite the turnaround, growth will not be sufficient to prevent the unemployment rate - now at a 26-year high of 9.8 percent - from rising. Economists predict it will hit 9.9 percent when the government releases the latest snapshot on employment conditions Friday. It’s expected to top 10 percent this year.
Rising unemployment, cautious consumers, tight credit, and troubles in the commercial real estate market are among the forces expected to weigh on the recovery going forward.
Against that backdrop, most economists think the Fed will keep the target range for its bank lending rate at zero to 0.25 percent tomorrow. If it does, commercial banks’ prime lending rate, used to peg rates on home equity loans, certain credit cards, and other consumer loans, will stay at about 3.25 percent, the lowest in decades.
“The Fed has some glide time right now to see where the economy is going,’’ said John Silvia, Wells Fargo’s chief economist.
For now, Silvia and other economists also predict Fed policy makers will maintain a pledge to keep rates “exceptionally low’’ for an “extended period’’ to make sure the recovery gains traction.
Whenever the Fed decides to drop this “extended period’’ language, it will be taken as a signal that the central bank is preparing to reverse course. Many analysts think the Fed could start to raise rates in the spring or summer.
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