Federal Reserve Is Trapped

The Federal Reserve Board is having its next meeting on October 24 - 25th. During the past two meetings the Federal Reserve has paused held short term interest rates steady. Will they pause hold rates steady once again?

Reasons Not to Lower Rates:

• Inflation Worries. As "readings on core inflation have been elevated, and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures."
• Attract Inflow of Foreign Capitol. (Ensure the dollar does not tank)
  

Reasons Not to Raise Rates:

• Recession Fears "The moderation in economic growth appears to be continuing"
• Don't want to cause a meltdown in the housing market. As the housing market activity is already "cooling considerably"

The Federal Reserve Board is trapped. Captain Bernanke is trying to steer the U.S.S. Economy but in all directions (raising or lowering rates) there are icebergs. What will captain Bernanke do? He will just sit tight and hope the icebergs melt on their own accord. [Meanwhile quietly cursing Greenspan for directing the ship into an iceberg field.] Meanwhile, the passengers on the U.S.S. economy are busy partying and trashing the ship making it more vulnerable to an iceberg collision. [No, I'm not suggesting the U.S.S. Economy is going to sink andthat we we fall into a depression. What I'm suggesting is that the ship is very vulnerable is very very likely to be in a recession by 1Q or 2Q 2007.]

It is very likely that captain Bernanke will, once again, hold rates steady later this month. They are in a very tough position.